FINANCIAL ACCOUNTING STANDARD
16
INDONESIAN INSTITUTE OF ACCOUNTANTS
Statement of Financial Accounting Standard (SFAS) No.16, Fixed Assets and Other Assets, was adopted by a meeting of the Indonesian Accounting Principles Committee on August 24, 1994 and was ratified by the Executive Committee of the Association of Indonesian Accountants on September 7, 1994.
Compliance with the policies contained in this Statement is not obligatory in the case of immaterial items.
Jakarta, September 7, 1994
Executive Committee
Association of Indonesian Accountants
Indonesian Accounting Principles Committee
Hans Kartikahadi Chairman
Jusuf Halim Secretary
Hein G. Surjaatmadja Member
Katjep K. Abdoelkadir Member
Wahjudi Prakarsa Member
Jan Hoesada Member
M. Ashadi Member
Mirza Mochtar Member
IPG. Ary Suta Member
Sobo Sitorus Member
Timoty Marnandus Member
CONTENTS Initial Measurement of Fixed Assets...13-22
Components of Cost...14-18 Acquisition of Group Assets...19
Exchanges of Assets...20-21 Donated Assets...22 Subsequent Expenditure...23-27
Subsequent Measurement of Initially Recorded Acquisition Costs...28-29 Depreciation...30-43
STATEMENT OF FINANCIAL ACCOUNTING STANDARD N0.16
FIXED ASSETS ANDOTHER ASSETS...58-78 Fixed Asset Recognition...59 Initial Recognition of Fixed Assets...60-63 Subsequent Expenditure...64
Subsequent Measurement of Initially Recorded Acquisition Costs...65 Depreciation...67-70
INTRODUCTION Objective
The objective of this Statement is to prescribe the accounting treatment for fixed assets. The principal issues in accounting for fixed assets are the timing of the recognition of the assets, the determination of carrying amounts and the depreciation charges to be recognized in relation to them, and the determination and accounting treatment of other impairments to the assets’ carrying value.
This Statement requires a fixed asset to be recognized as an asset when it satisfies the definition and recognition criteria of an asset as set forth in the Framework for the Preparation and Presentation of Financial Statements.
This Statement also addresses the criteria for other assets.
Scope
01. This Statement should be applied in accounting for fixed assets and other assets except when another financial accounting standard requires or permits a different accounting treatment.
02. This Statement does not apply to:
(a) forestry and renewable natural resources; and
(b) mining concessions, the exploration and extraction of minerals, oil, natural gas and similar non-renewable resources.
However, this Statement does apply to fixed assets used to develop or maintain the activities or assets covered in a. and b. but separable from those activities or assets.
04. SFAS No.13, Accounting for Investments, permits a company to treat investment properties as property, in accordance with this Statement, or as long-term investments, in accordance with SFAS No.13, Accounting for Investments.
Definitions
05. The terms used in this Statement are defined as follows:
Fixed assets are tangible assets which are acquired in a ready to use form, are constructed for use by the company, are not intended for sale in the company’s normal activities, and have a useful life of more than one year.
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
Depreciable amount is the acquisition cost of an asset, or other amount substituted for cost in the financial statements, less its residual value.
Useful life is either:
(a) the period over which a depreciable asset is expected to be used by the company; or
(b) the number of production units or similar units expected to be obtained from the asset by the company.
Acquisition cost is the amount of cash or cash equivalents paid, or the fair value of other consideration given to acquire an asset at the time of its acquisition or during the asset’s construction, until the asset is ready for its intended use.
Residual value is net amount which the company expects to obtain for an asset at the end of its useful life after deducting the expected costs of disposal.
Fair value is the amount for which an asset could be exchanged or for which a liability can be settled between knowledgeable parties who intended to perform an arm’s length transaction.
Carrying amount is the net book value, i.e. the acquisition cost of an asset less the accumulated depreciation.
EXPLANATION
Fixed Asset Recognition
06. A tangible item should be recognized as an asset and classified as a fixed asset when:
(a) it is probable that future economic benefits associated with the asset will flow to the
company; and
(b) the acquisition cost of the asset can be measured reliably.
07. Fixed assets often represent a major portion of the total assets of a company, and is therefore significant in the presentation of the company’s financial position. Furthermore, the determination of whether an expenditure represents an asset or an expense can have a significant effect on a company’s reported results of operations.
08. In determining whether an item satisfies the first criterion for recognition, a company needs to assess the degree of certainty attached to the flow of future economic benefits on the basis of the available evidence at the time of initial recognition. Existence of sufficient certainty that the future economic benefits will flow to the company require assurance that the company will receive the rewards attached to the asset and will undertake the associated risks. This assurance is usually only available when the risks and rewards have passed to the company. Before this condition occurs, the transaction to acquire the asset can usually be canceled without significant penalty and therefore the asset is not recognized.
09. The second criterion for recognition is usually readily satisfied because the exchange transaction evidencing the purchase of the asset identifies its cost. In the case of a self-constructed asset, a reliable measurement of the cost can be made from the transactions between external parties and the company for the acquisition of the materials, labor and other inputs used during the construction process.
10. In identifying what constitutes a separate fixed asset item, judgment is required in applying the criteria to the definition of specific types of companies. It may be appropriate to aggregate individually insignificant items, such as molds, tools and dies, and to apply the criteria to the aggregate value. Most spare parts and servicing equipment are usually carried as inventory and recognized as an expense when consumed. However, major spare parts and stand-by equipment qualify as fixed assets when the company expects to use them during more than one period. Similarly, if the spare parts and servicing equipment can be used only in connection with a fixed asset and their use is expected to be irregular, they are accounted for as fixed assets and are depreciated over a time period not exceeding the useful life of the related asset.
cost of each component can be obtained from its supplier or its producer. This is the case when the component assets have different useful lives or provide benefits to the company in a different pattern, thus necessitating the use of different depreciation rates and methods. For example, an aircraft and its engines need to be treated as separate depreciable assets if they have different useful lives.
12. Fixed assets may be acquired for safety or environmental reasons. The acquisition of such fixed assets, while not directly increasing the future economic benefits of any particular existing fixed asset, may be necessary in order for the company to obtain the future economic benefits from its other assets. When this is the case, such acquisitions of fixed assets qualify for recognition as assets, in that they enable future economic benefits from related assets to be derived by the company in excess of what it could derive if they had not been acquired. However, such assets are only recognized to the extent that the resulting carrying amount of such an asset and related assets does not exceed the total recoverable amount of that asset and its related assets. For example, a chemical manufacturer may have to install certain new chemical handling processes in order to comply with environmental requirements for the production and storage of dangerous chemicals; related plant enhancements are recognized as an asset to the extent they are recoverable because, without them, the company is unable to manufacture and sell chemicals.
Initial Measurement of Fixed Assets
13. An item which qualifies for recognition as a fixed asset and which is categorized as fixed assets, should initially be measured at its cost.
Components of Cost
14. The cost of a fixed asset comprises its purchase price, including import duties and non-refundable (non-creditable) input value added tax, and any directly attributable costs of bringing the asset to working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price. Examples of directly attributable costs are:
(a) the cost of site preparation;
(b) initial delivery and handling costs;
(c) installation costs; and
(d) professional fees such as for architects and engineers.
accordance with the permitted alternative treatment in SFAS No. 26, Accounting for Interest in the Construction Period.
16. Administration and other general overhead costs are not a component of the cost of fixed assets as long as they can not be directly attributed to the acquisition cost of the asset or bringing the asset to its working condition. Similarly, start-up and similar pre-production costs do not form part of the cost of an asset unless they are necessary to bring the asset to its working condition. Initial operating losses incurred prior to an asset achieving planned performance are recognized as an expense.
17. The cost of a self-constructed asset is determined using the same principles as for an acquired asset. If a company makes similar assets for sale in the normal course of business, the cost of the asset is usually the same as the cost of producing the assets for sale (see SFAS No. 14, Inventories). Therefore, any internal profits are eliminated in arriving at such costs. Similarly, the cost of abnormal amounts of wasted material, labor or other resources incurred in the production of a self-constructed asset is not included in the cost of the asset. SFAS No. 26, Accounting for Interest in the Construction Period, establishes criteria which need to be satisfied before interest costs can be recognized as a component of fixed asset cost.
18. The cost of an asset held by a lessee under a finance lease is determined using the principles set out in SFAS No. 30, Accounting for Leases.
Acquisition of a Group of Assets
19. The cost of each fixed asset acquired as a group is determined by allocating the total price based on the proportion of the fair value of each asset.
Exchanges of Assets
20. A fixed asset may be acquired in exchange or partially in exchange for a dissimilar item of fixed asset or other assets. The cost of such an item is measured at the fair value of the asset released or received, whichever is more reliable, equivalent to the fair value of the asset given up adjusted by the amount of any cash or cash equivalents transferred.
Donated Assets
22. Fixed assets acquired from donations should be recorded at an estimated price or fair market price by crediting a “Donated Capital” account.
Subsequent Expenditure
23. Subsequent expenditure to the initial acquisition of a fixed asset which can extend its useful life or likely provide future economic benefits by increasing its capacity, quality of production, or standard of performance, should be added to the carrying amount of the asset.
24. Subsequent expenditure on fixed assets is only recognized as an asset when the expenditure improves the condition of the asset beyond its originally assessed standard of performance. Examples of improvements which result in increased future economic benefits include:
(a) modification of a plant to extend its useful life, including an increase in its capacity;
(b) upgrading machine parts to achieve a substantial improvement in the quality of
output; and
(c) adoption of new production processes enabling a substantial reduction in previously assessed operating costs.
25. Expenditures on repairs or maintenance of fixed assets to restore or maintain the future economic benefits that a company can expect, or to maintain the original assessed standard of performance of the assets is usually recognized as an expense when incurred. For example, the cost of servicing or overhauling plant and equipment is usually an expense since it maintains, rather than increases, the originally assessed standard of performance.
27. Major components of some items of fixed assets may require replacement at regular intervals. For example, a furnace may require relining after a specified number of hours of usage or aircraft seats and galleys may require replacement several times during the life of the airplane. The components are accounted for as separate assets because they have different useful lives from related fixed assets. Therefore, provided the recognition criteria in paragraph 6 are satisfied, the expenditure incurred in replacing or renovating the component is accounted for as the acquisition of a separate asset and the replaced asset is written off.
Subsequent Measurement of Initially Recorded Acquisition Costs
28. Fixed assets are reported at the acquisition cost of the asset less the accumulated depreciation.
29. Fixed asset revaluation is not permitted because Financial Accounting Standards state that the asset valuation is based on acquisition cost or exchanged cost. A deviation from this Standard is permitted based on government regulations. In this case, financial statements should disclose the departure from the acquisition cost concept in presenting the fixed assets and the effect of the departure to the company’s financial statements. The difference between the revaluation amount and the book value of the fixed asset is recorded in the equity section under the heading “difference from fixed asset revaluation”.
Depreciation
30. The depreciable amount of a fixed asset should be allocated on a systematic basis over its useful life. The depreciation method used should reflect the pattern in which the asset’s economic benefits are consumed by the company. The depreciation charge for each period should be recognized as an expense of the related period unless it is included in the carrying amount of another asset.
31. As the economic benefits embodied in an asset are consumed by the company, the carrying amount of the asset is reduced to reflect this consumption, normally by charging an expense for depreciation. A depreciation charge is made even if the value of the asset exceeds its carrying amount.
32. The economic benefits embodied in a fixed asset are consumed by the company through the useful lives of the asset. However, other factors, such as technical obsolescence and wear and tear while an asset remains idle, often result in the diminution of the economic benefits that might have been expected to be available from the asset. Consequently, each of the following factors need to be considered when determining the useful life of an asset:
(b) the expected physical wear and tear, which depends on operational factors such as he number of shifts for which the asset is to be used and the repair and maintenance program of the company, including the care and maintenance of the asset while idle;
(c) technical obsolescence arising from changes or improvements in production, or from a change in the market demand for the product or service output of the asset; and
(d) legal or similar limits on the use of the asset, such as the expiry dates of related leases.
33. The useful life of an asset is defined in terms of the asset’s expected utility to the company. The asset management policy of an company may effect the depreciation amount of an asset after a specified time or after consumption of a certain proportion of the economic benefits embodied in the asset. Therefore, the useful life of an asset may be shorter than its economic life. The estimation of the useful life of a fixed asset is a matter of judgment based on the experience of the company with similar assets.
34. Land and buildings are separable assets and should be treated separately for accounting purposes, even when they are acquired together. Land normally has an unlimited life and, therefore, is not depreciated. Buildings have a limited life and, therefore, are depreciable assets. An increase in the value of the land on which a building stands does not affect the determination of the useful life of the building.
36. When the purchase of an asset will result in significant dismantling, removal or restoration costs at the end of the asset’s useful life, these costs are recognized as an expense over the life of the asset either:
(a) by deducting the estimated costs in determining the residual value of the asset and thereby increasing the annual depreciation charge. Any resulting negative carrying amount is recognized as a liability; or
(b) when the estimated costs are not deducted in determining the residual value, by recognizing the costs as a separate expense over the life of the asset such that the liability for these costs is fully provided for at the end of the asset’s useful life.
37. A variety of depreciation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life. These methods include depreciation based on timing, utilization and other criteria (see SFAS No. 17, Depreciation Accounting). The method used for an asset is selected based on the expected pattern of economic benefits and is consistently applied from period to period unless there is a change in the expected pattern of economic benefits from that asset.
38. The depreciation charge of a period is usually recognized as an expense. However, in some circumstances, the economic benefits embodied in an asset are absorbed by the company in producing other assets rather than giving rise to an expense. In this case, the depreciation charge comprises part of the cost of the other asset and is included in its carrying amount. For example, the depreciation of manufacturing plant and equipment is included in the costs of conversion of inventories (see SFAS No. 14, Inventories). Similarly, depreciation of fixed assets used for development activities may be included in development costs which are capitalized in accordance with SFAS No. 20, Research and Development Costs.
Review of Useful Life
39. The useful life of a fixed asset should be reviewed periodically and, if expectations are significantly different from previous estimates, the depreciation charge for the current and future periods should be adjusted.
40. During the life of an asset it may become apparent that the estimate of its useful life is inappropriate. For example, the useful life may be extended by subsequent expenditure on the asset which improves the condition of the asset beyond its originally assessed standard of performance. Alternatively, technological changes or changes in the market for the products may reduce the useful life of the asset. In such cases, the useful life and therefore the depreciation rate is adjusted for the current and future periods.
Review of Depreciation Method
42. The depreciation method applied to fixed assets should be reviewed periodically and, if there has been a significant change in the expected pattern of economic benefits from those assets, the method should be changed to reflect the changed pattern. A change in depreciation method should be accounted for as a change in accounting policy and reported in accordance with SFAS No. 25, Net Profit or Loss for the Current Period, Fundamental Errors and Changes in Accounting Policies. The depreciation charge for the current and future periods should be adjusted.
Impairment of Economic Benefit
43. When the economic benefit of a fixed asset is no longer as large as the amount recorded, the asset should be stated at an amount equivalent with the residual economic benefit. The impairment of the fixed asset’s benefit should be reported as a loss.
Retirements and Disposals
44. A fixed asset should be eliminated from the balance sheet on disposal or when the asset is permanently withdrawn from use and no future economic benefits are expected from its disposal.
45. Gains or losses arising from the retirement or disposal of a fixed asset should be recognized as income or expense in the income statement.
46. When a fixed asset is exchanged for a similar asset, under the circumstances described in paragraph 21, the cost of the acquired asset is equal to the carrying amount of the asset disposed and no gain or loss is recognized.
47. Sale and leaseback transactions are accounted for in accordance with SFAS No. 30, Accounting for Leases.
48. Fixed assets which are retired from active use and held for disposal are valued at the lower of its carrying amount and its net realizable value.
Disclosure
49. The financial statements should disclose, in respect to each class of fixed assets, the following:
(a) the measurement bases used for determining the gross carrying amount. When more than one basis has been used, the gross carrying amount for that basis in each category should be disclosed;
(c) the useful lives or the depreciation rates used;
(d) the gross carrying amount and the accumulated depreciation at the beginning and end of the period;
(e) a reconciliation of the carrying amount at the beginning and end of the period showing:
(i) additions;
(ii) disposals;
(iii) acquisitions through business combinations;
(iv) revaluations based on government regulations;
(v) reductions in the carrying amount in accordance with paragraph 43;
(vi) the net exchange differences arising on the translation of the financial statements of a foreign entity;
(vii) depreciation; and
(viii) reclassifications.
50. The financial statements should also disclose:
(a) the existence and restrictions on ownership title, and fixed assets pledged as security for liabilities;
(b) the accounting policy for renovation costs relating to fixed assets;
(c) the amount of expenditure for fixed assets under construction; and
(d) the amount of commitments for the acquisition of fixed assets.
52. A company discloses the nature and effect of a change in an accounting estimate that has a material effect in the current period or which is expected to have a material effect in subsequent periods in accordance with SFAS No. 25, Net Profit or Loss for the Current Period, Fundamental Errors and Changes in Accounting Policies.
Such disclosure may arise from changes in:
(a) residual values;
(b) dismantling, removal or restoration costs;
(c) useful lives; and
(d) depreciation methods.
53. When a fixed asset is stated at a revalued amount, the following should be disclosed:
(a) the basis used to revalue the assets;
(b) the effective date of the revaluation;
(c) name of the independent appraiser, if any;
d) the nature of any indices used to determine replacement cost;
(e) the carrying amount of each class of fixed asset; and
(f) the revaluation surplus of the fixed asset.
54. Financial statement users also find the following information relevant: (a) the carrying amount of a temporarily idle fixed assets;
(b) the gross carrying amount of any fully depreciated fixed assets which are still in use;
(c) the carrying amount of a fixed asset retired from active use and held for disposal; and
(d) when the benchmark treatment is used, the fair value of the fixed asset when this is materially different from the carrying amount.
Companies are encouraged to disclose these amounts.
55. Other assets are items which cannot be classified as fixed assets nor as current assets, investments or intangible assets. For example, idle fixed assets, shareholder receivables, deferred charges, and other assets are reported as other assets.
56. Charges which were not reported as expenses within the period they occurred because they were assumed as useful in the future are classified as deferred charges.
Items included in this classification are:
(a) organization costs a company incurs during its development stage (see SFAS No. 6, Accounting and Reporting by Development Stage Enterprises).
(b) stock issuance costs, i.e. costs incurred during the offering of stocks to the public including notary and legal expenses, appraisers, printing, registration fees, underwriter fees, etc.
STATEMENT FOR FINANCIAL ACCOUNTING STANDARD NUMBER 16
FIXED ASSETS AND OTHER ASSETS
Statement of Financial Accounting Standard No. 16 consists of paragraphs 58-76. This Statement should be read in the context of paragraphs 1-57.
58. This Statement should be applied in accounting for fixed assets and other assets except when another financial accounting standard requires a different accounting treatment.
Fixed Asset Recognition
59. A tangible item should be recognized as an asset and be classified as a fixed asset when:
(a) it is probable that future economic benefits associated with the asset will flow to the
company; and
(b) the cost of the asset to the company can be measured reliably.
Initial Measurement of Fixed Assets
60. A fixed asset which qualifies for recognition as an asset and is categorized as fixed asset should initially be measured at its acquisition cost.
61. The cost of each fixed asset acquired as a group is determined by allocating the total price of the asset group based on the comparison of the fair value of each asset.
62. A fixed asset may be acquired in exchange or partly exchanged for a dissimilar fixed asset or other assets. The cost of such an item is measured at the fair value of the asset released or received, whichever is more reliable, equivalent to the fair value of the asset given up adjusted by the amount of any cash or cash equivalents transferred.
63. Fixed assets acquired from donations should be recorded at their estimated price or fair market price by crediting a “donated capital” account.
Subsequent Expenditure
Subsequent Measurement of Initially Recorded Acquisition Costs
65. Fixed assets are reported at the cost of the asset less the accumulated depreciation.
66. Fixed asset revaluations are not permitted because Financial Accounting Standards states that asset valuation is based on the acquisition cost or exchanged cost. A departure from this Standard is permitted based on government regulations. In this case, financial statements should disclose the departure from the acquisition cost method and its effect on the company’s financial statements. The difference between the revaluation value and the book value of the fixed asset is recorded in the equity section under the heading “difference from fixed asset revaluation”.
Depreciation
67. The depreciable amount of a fixed asset should be allocated on a systematic basis over its useful life. The depreciation method used should reflect the pattern in which the asset’s economic benefits are consumed by the company. The depreciation charge for each period should be recognized as an expense in the related period unless it is included in the carrying amount of another asset.
68. The useful life of a fixed asset should be reviewed periodically and, if expectations are significantly different from previous estimates, the depreciation charge for the current and future periods should be adjusted.
69. The depreciation method applied to fixed assets should be reviewed periodically and, if there has been a significant change in the expected pattern of economic benefits from those assets, the method should be changed to reflect the new pattern. The change in the depreciation method should be accounted for as a change in accounting policy and reported as set forth in SFAS No. 25, Net Profit or Loss for the Current Period, Fundamental Errors and Changes in Accounting Policies, and the depreciation charge for the current and future periods should be adjusted.
70. When the economic benefit of a fixed asset has fallen below the amount recorded, then the asset should be stated at an amount equivalent with the residual economic benefit. The impairment of the fixed asset should be reported as a loss.
Retirements and Disposals
71. A fixed asset should be eliminated from the balance sheet on disposal or when the asset is permanently withdrawn from use and no future economic benefits are expected from its disposal.
72. Gains or losses arising from the retirement or disposal of a fixed asset should be recognized as income or expense in the income statement.
73. Financial statements should disclose, in respect to each class of fixed asset, the following:
(a) the measurement base used for determining the gross carrying amount. When more than one basis has been used, the gross carrying amount for that base in each category should be disclosed;
(b) the depreciation methods used;
(c) the useful lives or the depreciation rates used;
(d) the gross carrying amount and the accumulated depreciation at the beginning and end of the period;
(e) a reconciliation of the carrying amount at the beginning and end of the period which shows:
(I) additions;
(ii) disposals;
(iii) acquisitions through business combinations;
(iv) revaluations performed based on government regulations;
(v) reductions in the carrying amount in accordance with paragraph 66;
(vi) the net exchange differences arising from the translation of the financial statements of a foreign entity;
(vii) reclassifications; and
(viii) depreciation.
74. Financial statements should also disclose:
(a) restrictions on ownership title, and fixed assets pledged as security for liabilities;
(b) the accounting policy for repair costs relating to fixed assets;
(c) the amount of expenditures for fixed assets under construction account; and
(d) the amount of commitments for the acquisition of fixed assets.
(a) the basis used to revalue the assets;
(b) the effective date of the revaluation;
(c) name of independent appraiser, if any;
(d) the nature of any indices used to determine replacement cost;
(e) the carrying amount of each class of fixed asset; and
OTHER ASSETS
76. Other assets are items which cannot be classified as fixed assets, current assets, investments or intangible assets. For example, idle fixed assets, shareholder receivables, deferred charges are reported as other assets.
77. When the company chooses to calculate income tax in accordance with accounting profit, the difference in the computation of the tax liability (which is calculated in accordance with taxable income) resulting from the timing difference of income and expense recognition for accounting purposes and tax purposes, is recorded in the “deferred income tax” account, classified as part of other assets and allocated to taxable charges in future years.
Effective Date
