Microsoft Word - Project Report on Financial Savings Through Fixed Asset Management for Ispat Final

A

SUMMER TRAINING PROJECT REPORT

ON

“FINANCIAL SAVINGS THROUGH FIXED ASSETS MANAGEMENT”

ISPAT INDUSTRIES LTD.

Submitted in partial fulfillment of the requirement For the award of degree of

MASTER’S OF MANAGEMENT STUDIES (MMS)

(2010-2011)

SUBMITTED BY: MR. ROHAN SUNIL SHIRDHANKAR

UNDER THE GUIDANCE OF MS. SADHNA OGALE

SARASWATI EDUCATION SOCIETY’S SARASWATI COLLEGE OF ENGINEERING (MMS) PLOT NO. 46, SECTOR 6, NEAR UTSAV CHOWK,

KHARGHAR, NAVI MUMBAI-410210

II

ISPAT INDUSTRIES LIMITED

There is something about steel

There is something about ISPAT

III

Company certificate

IV

Institute Certificate

V

DECLARATION

I, Rohan S Shirdhankar, student of MMS IIInd semester, studying at Saraswati College

of Engineering’s Department of Master of Management Studies Kharghar, hereby

declare that the summer training report on “FINANCIAL SAVINGS THROUGH

MANAGEMENT OF FIXED ASSETS” submitted to Mumbai University, Mumbai in

partial fulfillment of degree of Master’s of Management Studies is the original work

conducted by me.

The information and data given in the report is authentic to the best of my knowledge.

This summer training report is not being submitted to any other university for award of

any other degree, diploma and fellowship.

(Rohan Sunil Shirdhankar)

VI

ACKNOWLEDGEMENT

It is my pleasure to be indebted to various people, who directly or

indirectly contributed in the development of this work and who influenced my thinking,

behavior, and acts during the course of study.

I express my sincere gratitude to Dr.J.G.Kori worthy Principal for

providing me an opportunity to undergo summer training.

I am thankful to Mr.Pravin More our H.O.D for his support, cooperation,

and motivation provided to me during the training for constant inspiration, presence

and blessings.

I also extend my sincere appreciation to Mr. Sunil K Garg VP (Accounts)

who provided his/her valuable suggestions and precious time in accomplishing my

project report.

Lastly, I would like to thank the almighty and my parents for their moral

support and my friends with whom I shared my day-to-day experience and received lots

of suggestions that improved my quality of work.

(Rohan Sunil Shirdhankar)

FINANCIAL SAVINGS THROUGH FIXED ASSETS MANAGEMENT

Page | 7

ABSTRACT

The project “Financial Savings Through Fixed Assets Management” is defined as the

selling of the assets which are Idle or which are not in the production use. It refers to removing of the

assets from the Fixed Asset Register which are not in use or which are costing high on repairs and

maintenance cost. It mainly focuses on financial saving through discarding the obsolete and used assets.

Purpose of the project:

· To review the assets which can be physically disposed off in the fiscal year 2010 - 11.

· To study the accounting of Fixed Assets as per AS- 10, Accounting of the Depreciation on Fixed

Assets AS- 6 and the accounting of Impairment losses as per AS-28.

· To check whether the method of depreciation for the FIXED ASSETS is appropriate as per the

Companies Act,1956.

· To review the Fixed Asset Register and to check for any errors in the register .

· To provide the information regarding the procedure of disposal of particular fixed assets and give

information about the different methods through which disposal can be done. For Example: sale

by public tender, sale though company agent, donating, etc


Page | 8

EXECUTIVE SUMMARY

In few years Steel is vital to the development of any modern economy and is considered to be the

backbone of the human civilization. The level of per capita consumption of steel is treated as one of the

important indicators of socio-economic development and living standard of the people in any country. It

is a product of a large and technologically complex industry having strong forward and backward

linkages in terms of material flow and income generation. All major industrial economies are

characterized by the existence of a strong steel industry and the growth of many of these economies has

been largely shaped by the strength of their steel industries in their initial stages of development.

This Project gave me a great learning experience and at the same time it gave me enough scope

to implement my analytical ability. The analysis and advice presented in this Project Report entitled as

“Financial Savings Through Disposal of Idle Fixed Assets” is based on the research analysis done and

also having a survey of the fixed asset in the company premises.

The project report comprises of identification of those fixed asset, which are idle and not used in

the production process as they are in broken condition or there installation cost is very high. The report

also gives knowledge about those fixed assets, which are costing high on maintenance and repairs and

are frequently in the maintenance department.

This Project as a whole can be divided into two parts.

The first part gives an insight about the different Fixed Assets and the accounting of the fixed

assets. The need and procedure for the disposal of fixed assets is also mentioned in this project. The

project helps us to understand how to make Financial Savings through proper Management of the Fixed

Assets. The proper management includes acqusition of fixed assets, its replacement and disposal after a

stipulated period. The financial savings can be made by reducting the costs inrelation to the fixed assets

such as depreciation, repairs and maintenance, operating cost, etc. The project also talks about the

accounting standards by ICAI namely AS-10 accounting of Fixed Assets and AS-28 Impairment of the

Fixed Assets.

The second part of the Project consists of research and analysis to find out whether there is any

need to dispose off the fixed assets and investigation to find out which fixed assets can be disposed and


Page | 9

which need a replacement. The project report also gives us an idea about the total amount of fixed assets

that are depreciated to there 95% of acquisition value. It also concentrates on physical investigation of

the Fixed Assets situated in the Dolvi Plant to verify whether they are in working condition.


Page | 10

TABLE OF CONTENTS

SR. No

CHAPTER NO

PARTICULARS PAGE NO

1. DECLARATION V

2. ACKNOWLEDGEMENT VI

3. ABSTRACT VII

4. EXECUTIVE SUMMARY VIII

5. 1. INDUSTRY OVERVIEW AND COMPANY PROFILE

1 - 9

1.1

1.2

OVERVIEW OF THE INDUSTRY

A) STEEL INDUSTRY IN WORLD B) STEEL INDUSTRY IN INDIA

COMPANY PROFILE A) ABOUT ISPAT INDUSTRIES LTD. B) VALUES OF IIL C) VISION AND MISSION OF IIL D) PROCESSES OF IIL E) PRODUCTS F) QUALITY PROCESSES G) CSR ACTIVITY H) ACHIEVEMENTS

1 - 4 1 – 2 2 – 4

4 – 9 4 – 5 6 – 6 6 – 6 6 – 6 7 – 9 9 – 9 9 – 9 9 - 9

6. 2. OBJECTIVES AND SCOPE OF THE STUDY 10 – 11

7. 3 INTRODUCTION OF THE TOPIC 12 - 14

8. 4 FIXED ASSETS AND ACCOUNTING OF FIXED ASSETS

15 - 31

4.1 4.2 4.3 4.4

FIXED ASSETS (DEFINITION AND CLASSIFICATION): ACCOUNTING FOR FIXED ASSETS (AS- 10 by ICAI) FIXED ASSETS REGISTER DEPRECIATION (DEFINITION AND ITS METHODS)

15 – 17 17 – 22 22 – 25 25 – 31


Page | 11

9. 5 FIXED ASSET DISPOSAL AT IIL 32 - 37

10. 6 SAVINGS THROUGH FIXED ASSETS MANAGEMENT

38 - 57

6.1

6.2 6.3

HOW FINANCIAL SAVINGS CAN BE DONE THROUGH DISPOSAL OR REPLACEMENT OF FIXED ASSETS IMPAIRMENT OF THE FIXED ASSETS (AS 28 by ICAI) FIXED ASSET DISPOSAL PROCEDURE

41 - 52 46 - 52 52 - 57

11. 7 RESEARCH METHODOLOGY 58 - 59

12. 8 DATA ANALYSIS AND INTERPRETATION 60 – 72

10.1 10.2

ANALYSIS OF THE COMPANY COMPETITOR ANALYSIS (COMPARISON WITH INDUSTRY AVERAGES)

60 – 67 67 - 72

13. 9 RESULTS AND FINDINGS 73 - 75

14. 10 CONCLUSIONS 76 - 76

15. 11 LIMITATIONS OF THE STUDY 77 - 77

16. 12 SUGGESTIONS AND RECOMMENDATIONS 78 - 79

17. 13 GLOSSARY 80 - 80

18. REFERENCES 81 - 81

19. ANNEXURE IX - XI


Page | 12

CHAPTER 1- OVERVIEW OF THE INDUSTRY AND COMPANY

PROFILE

1.1 OVERVIEW OF THE INDUSTRY Steel is vital to the development of any modern economy and is considered to be the backbone

of the human civilization. The level of per capita consumption of steel is treated as one of the important

indicators of socio-economic development and living standard of the people in any country. It is a

product of a large and technologically complex industry having strong forward and backward linkages in

terms of material flow and income generation. All major industrial economies are characterized by the

existence of a strong steel industry and the growth of many of these economies has been largely shaped

by the strength of their steel industries in their initial stages of development.

A.) STEEL INDUSTRY IN WORLD

Steel, a recycled product is one of the top products of the manufacturing sector. Steel industry is

booming industry in the world. The Infrastructure industry, Automobile industry, Construction industry

and Oil and Gas Industry generate the increasing demand of steel. After the adoption of liberalization

policies all over the world, the world steel industry is growing very fast. Among the top steel producers

in the world, China ranked 1st followed by Japan, United States. Russia and South Korea. China, as the

world’s major producer and consumer, and has a considerable influence on the industry globally, but

more sharply in Asia The Indian scenario has changed due to 2 major Merger and Acquisition and one is

Mittal steel acquired Arcelor steel and became worlds largest steel producer named Arcelor- Mittal and

the other is Tata Steel of India or TISCO has acquired the world's fifth largest steel company, Corus,

with the highest ever stock price.

The Indian steel industry has made a rapid progress on strong fundamentals over the recent few

years. The industry is getting all essential ingredients required for dynamic growth. The government is

backing the industry through favorable industrial reforms, while the private sector is supporting it with

investments worth billions of dollars. Even in the tough times of economic slowdown, the industry

succeeded to sustain its positive growth


Page | 13

momentum on the strong fundamentals of domestic demand from construction, automobile and

infrastructure sectors and due to strong global demand. With an impressive track record, the country has

become a reputed name in the world steel industry. Global steel giants from all over the world have

shown interest in the industry because of its phenomenal performance.

CONTRIBUTION OF THE COUNTRIES TO GLOBAL STEEL INDUSTRY

The countries like China, Japan, India and South Korea are in the top of the above in steel

production in Asian countries. China accounts for one third of total production i.e. 419m ton, Japan

accounts for 9% i.e. 118m ton, India accounts for 53m ton and South Korea is accounted for 49m ton,

which all totally becomes more than 50% of global production. Apart from this USA, BRAZIL, UK

accounts for the major chunk of the whole growth. The steel industry has been witnessing robust growth

in both domestic as well as international markets.

B.) STEEL INDUSTRY IN INDIA

GLOBAL RANKING OF INDIAN STEEL:

Global crude steel production reached 1220 million tonne in 2009.China was the largest

crude steel producer in the world with production reaching 567.8 million tonne, a growth of 13.5 per

cent over 2008. India once again emerged as the fifth largest producer in 2009 and recorded a growth of

2.7 per cent as compared to 2008, the only other country in the top 10 brackets to register a positive

growth during 2009. India also emerged as the

37%

4%

18% 8% 3%9%

8%

13%

Steel Production in world

China

India

Europe

USA

Brazil

Japan

CIS

Others


Page | 14

largest sponge iron producing country in the world in 2009, a rank it has held on since 2002. If proposed

expansions plans are implemented as per schedule, India may become the second largest crude steel

producer in the world by 2015-16.

STEEL SECTOR TRENDS

· India emerged as the fourth largest steel producer in the world and is expected to become the 2nd

largest producer of crude steel in the world by 2015.

· India also maintained its lead position as the world's largest producer of direct reduced iron

(DRI) or sponge iron. Sponge iron production for sale was 20.8 million tonnes in 2008-09, which

was higher by 2.1% over 2007-08.

· The country is likely to achieve a crude steel production capacity of 124 million tonnes by the

year 2012.

· 222 Memorandum of Understanding (MoUs) have been signed by the investors with various

State Governments for setting up additional 276 million tones of steel capacity in the country.

Public sector undertakings in steel Industry:

· Steel Authority of India Ltd., (SAIL), New Delhi

· Kudremukh Iron Ore Company Ltd. (KIOCL), Bangalore.

· National Mineral Development Corporation Ltd. (NMDC), Hyderabad.

· Hindustan Steelworks Construction Ltd. (HSCL), Kolkata.

· MECON Ltd., Ranchi.

· Manganese Ore (India) Ltd. (MOIL), Nagpur.

· Sponge Iron India Ltd. (SIIL), Hyderabad.

· Bharat Refractories Ltd. (BRL), Bokaro.

· Rashtriya Ispat Nigam Ltd. (RINL), Visakhapatnam.

· MSTC Ltd., Kolkata.

· Ferro Scrap Nigam Ltd. (FSNL), Bhilai, (A subsidiary of MSTC Ltd.).

Other Public Sector Undertakings (PSUs):


Page | 15

· KudremukhIronOre Company Limited (KIOCL)

· National Mineral Development Corporation Ltd. (NMDC)

· Hindustan Steelworks Construction Limited (HSCL)

· MECON Limited

· Bharat Refractories Ltd. (BRL)

· Manganese Ore (India) Ltd. (MOIL)

· Sponge Iron India Ltd. (SIIL)

· Rashtriya Ispat Nigam Ltd. (RINL)

· MSTC Ltd.

· Ferro Scrap Nigam Limited (FSNL)

Private Sector:

· Tata Steel Ltd.

· Essar Steel Ltd.

· JSW Steel Ltd.Jindal

· Steel & Power Ltd.(JSPL)

· Ispat Industries Ltd. (IIL)

· Bhushan Power & Steel Ltd.

· Monnet Ispat & Energy Ltd.

1.2 OVERVIEW OF THE COMPANY PROFILE A) ABOUT ISPAT INDUSTRIES LIMITED

Ispat Industries Limited was set up as Nippon Denro Ispat Limited in May 1984 by founding

Chairman Mr M L Mittal, is one of the leading integrated steel makers. It mainly operates in steel, iron,

minning, energy and infrastructure. Ispat Industries Limited (IIL) is one of the leading integrated steel

makers and the largest private sector producer of hot rolled coils in India., a corporate powerhouse with

operations in iron, steel, mining, energy and infrastructure. The company's core competency is the

production of high quality steel, for which it employs cutting edge technologies and stringent quality


Page | 16

standards. It produces world-class sponge iron, galvanized sheets and cold rolled coils, in addition to hot

rolled

coils, through its two state-of-the art integrated steel plants, located at Dolvi and Kalmeshwar in the state

of Maharashtra.

To better provide steel solutions to an increasingly sophisticated marketplace, IIL had sets

up a highly advanced cold rolling reversing mill during the year 1988, in collaboration with Hitachi of

Japan, to manufacture a wide range of cold rolled carbon steel strips. In the same year, the company

installed a color coating line, the first of its kind in India for the manufacture of pre-painted color steel

sheets. During the year 1994, Business interests within the Ispat Group are demarcated. The eldest son,

Mr. L N Mittal continues to manage the international operations while Mr.Pramod Mittal and Mr. Vinod

Mittal, the younger brothers focused on steel and other businesses in India. In the identical year 1994, it

commissioned the world's largest gas-based single mega module plant for manufacturing direct reduced

iron (sponge iron), at its Maharashtra-based Dolvi plant. Within three months, the plant exceeds its

capacity of 1 million tonnes per annum (MTPA) of high quality DRI. The company came out with a

Euro-issue of 125-mln fully convertible bonds in 1994 to part-finance the expansion of its hot strip mill

(HSM) capacity to 2.50 lakhs TPA.

The Company aims to consolidate its market leadership in the national specialty steel market by

capitalizing on the proximity of its manufacturing facilities to major consumers of flat steel products in

Maharashtra, while increasing its presence in international markets by using its convenient port location.

In the short span of time since its inception, Ispat Industries has steadily raised the bar - in terms of its

relentless pursuit of technological advancement, unwavering focus on innovation, strident emphasis on

quality products and its constant initiatives aimed at ensuring customer satisfaction. It has 2 integrated

steel plants located at Dolvi and Kalmeshwar, in maharashtra. It is headquatered at Mumbai and

employees about 3,347 employees. It carries its business not only in India but also in word. The

company's core competency is the production of high quality steel, for which it employs cutting edge

technologies and stringent quality standards. It produces world-class sponge iron, galvanized sheets and

cold rolled coils, in addition to hot rolled coils.


Page | 17

B) VALUES OF IIL

· Respect the skills and integrity of professionals

· Empower those who belong to it

· Work in tandem with the environment

· Listen to the stakeholders, be they customers or communities

· Build value for all the shareholders and the Society with which it coexist.

C) VISION AND MISSION OF IIL: To be an organization that continuously achieves economic value by optimizing resources

through operational excellence, powered by technology, driven by innovation creating customer delight.

To be amongst the world’s most admired new generation steel companies: in products, in service, in

work ethics, and in the culture of societal integration

D) PROCESSES OF IIL:

I. Dolvi Plant: -

The sprawling 1,200 acres Dolvi complex, located

on the coast of Maharashtra houses hot rolled coils plant,

sponge iron plant and blast furnace that combines the latest

technologies - the Conarc process for steel making and the

compact strip process (CSP) - introduced for the first time

in Asia.

II.Kalmeshwar plant: -

The Kalmeshwar complex houses Ispat's 0.4 million

tonnes cold rolling complex, which also includes the

galvanized plain/ galvanized corrugated (GP/GC) lines and

India's first colour coating mill.


Page | 18

E) PRODUCTS:

I. Sponge Iron:

In September 1994, Ispat Industries

commissioned the world's largest gas based, single

mega-module plant for making sponge

iron/direct reduced iron (DRI), in

Maharashtra, India and it is one of the most

efficient Sponge Iron plants in the world.

Sponge Iron is mainly used as a raw material for speciality steel as well as substitute for scrap.

The rise in price of scrap and other factors have led to the increase in the use of sponge iron for

making high quality steel.

II. Hot Rolled coils:

Ispat Industries Limited manufactures

international standard hot rolled (HR) coils at its Hot

Strip Mill (HSM), situated at Dolvi in the state of

Maharashtra, India. The production of these coils

involves the use of state-of-the-art equipment and

manufacturing processes that ensure products of the


Page | 19

highest quality. Ispat's HSM uses a combination of the advanced Conarc Process and Thin Slab

Casting technology

III. Cold Rolled Coils:

Ispat Industries Limited, cold rolled coils are

manufactured at the highly advanced cold rolling mill at

Kalmeshwar, and can be used in a wide variety of

applications as follows:

· In industrial goods such as automobile components, precision tubes and consumer durables.

· In the manufacture of bodies of vehicles as varied as automobiles and railway coaches.

· For the production of heavy machinery like earthmoving and material-handling equipment

· Specially suited for panel applications in refrigerator bodies and washing machines.

· In bicycle parts, office equipment and furniture.

· For basic items such as galvanized sheets, tin-plates, drums and barrels.

IV. Galvanized Sheets:

Ispat Industries Limited was the first Indian

company to set up a Continuous Galvanizing Line for thin

gauge sheets in 1985. With two Galvanizing Lines and

high performance sophisticated corrugation

machines at its plant at Kalmeshwar, it

manufactures coils and GP/GC sheets that serve the

specific need of varied applications as per

customer’s requirements.


Page | 20

V. Colour Coated Sheets:

Ispat manufactures colour coated sheets called

Polysteel, in a variety of shades and designs, such as

dark or pastel, printed or plain and striped or

embossed. Polysteel is durable, cost-effective and easy

to install and use. Polysteel building sheets, for

instance, make it possible to design and construct

customers’ choice of beautiful structures, save on

structural steel and maintenance, and obtain overall cost effectiveness.

F) QUALITY PROCESSES:

· Six Sigma

· Total Quality Management

· Total Productive Maintenance

G) CSR ACTIVITY:

· IIL provides 44 villages with free drinking water.

· Beautification of public spaces with the concurrence of the local administration.

· IIL routinely distributes textbooks, school uniforms, notebooks and computers to students of

schools in the vicinity.

· Ispat has recognized Tree plantation and landscaping as an important tool to improve the Eco

system. A full- fledged nursery is maintained to support the green drive.

· IIL’s contribution During the Floods of 26/7 and for the Tsunami-affected victims.

H) ACHIEVEMENTS:

Since its inception, the IIL has been moving from strength to strength, consistently breaking new

grounds and spearheading new developments in iron and steel. Some of the key achievements are as

follows:


Page | 21

· Acknowledged many Quality Certificates from ISO, License for Quality Systems, National

Quality Awards, etc.

· Received many awards Such as Amity HR growth award, Golden peacock National Training

award, Good green governance award, TPM Excellence award, safety innovation award,

Excellence kaizen award, etc

· Acquired many awards for corporate social work.

· Ispat Industries was ranked 5th among major steel companies in India for the year 2008 by

Business World.

· Ispat Industries Ltd (IIL) ranks 45th in the FE-500 ranking of 2005.

CHAPTER – 2 OBJECTIVES AND SCOPE OF THE STUDY

2.1 OBJECTIVES OF THE STUDY:

· To discard or remove those Fixed Assets from the Fixed Asset Register, which are not in active

use or which are idle.

· To discarding or removing those Fixed Assets from the Fixed Asset Register, which are stated at

the lower of their net book value.

· To check whether the method and the rates of depreciation for the Fixed Assets is appropriate

· To ensure Fixed Assets availability where and when needed.

· To track fixed assets for the purposes of financial accounting, preventive maintenance, and theft

deterrence.

2.2 SCOPE OF THE STUDY:

The Indian steel industry has entered into a new development stage from 2005-06, riding high

on the resurgent economy and rising demand for steel. Rapid rise in production has resulted in India

becoming the 5TH largest producer of steel. The research was carried on in ISPAT INDUSTRIES.


Page | 22

I had been sent to the plant of ISPAT INDUSTRIES LTD situated at DOLVI,

MAHARASHTRA where I completed my Project work. I surveyed on my Project Topic “Financial

savings through fixed asset management” by investigating about those Fixed Assets, which are not used

in the operational process, or those, which are costing, high on Repairs and Maintenance cost in Sponge

Iron plant, Blast Furnace Plant and Hot Strip Mill Plant situated at Dolvi plant.

The study of “Financial Savings through Fixed Assets Management” will help to know which fixed

assets are not in active use or idle or which are stated at the lower of their net book value. Also it helps

to know the accounting of the fixed asset in case of acquisition,

retirement or replacement of the Fixed Assets. It also provides the information regarding the impairment

of the long-lived fixed assets. The project has also reviewed the procedure for disposal or replacement of

Fixed Assets.

This project report may help the company to make further planning and strategy.


Page | 23

CHAPTER – 3 INTRODUCTION TO THE PROJECT

The project topic “FINANCIAL SAVINGS THROUGH FIXED ASSETS MANAGEMENT”

clearly mentions the deduction in the expenditure costs, which are in connection with those fixed assets,

which are not used in the operational process. Thus disposal of such assets which are idle or not used in

the production process can save money as they can deduct the expenditures such as Repairs and

Maintenance to these assets, Depreciation on these assets, Interest charges in case the assets are acquired

by borrowed capital, etc.

The project on “Financial Savings through Fixed Asset Management” mainly focuses on

discarding or removing of those Fixed Assets, which are not used in the current operational process or

which are idle. The project also concentrates on those assets, which are high on the maintenance cost. It

mainly focuses on identification and then disposal of the assets which are idle or which are frequently

under repairs eventually increasing the operating cost for production. It also provides information about

the procedure of disposal or transfer of fixed assets.

PURPOSE OF THE PROJECT


Page | 24

The project “Financial Savings Through Fixed Assets Management” is defined as the selling of

the assets which are Idle or which are not in the production use. It refers to removing of the assets from

the Fixed Asset Register which are not in use or which are costing high on repairs and maintenance cost.

It mainly focuses on financial saving through discarding the obsolete and used assets.

Purpose of the project:

· To review the assets which can be physically disposed off in the fiscal year 2010 - 11.

· To study the accounting of Fixed Assets as per AS- 10, Accounting of the Depreciation on Fixed

Assets AS- 6 and the accounting of Impairment losses as per AS-28.

· To check whether the method of depreciation for the FIXED ASSETS is appropriate as per the

Companies Act,1956.

· To review the Fixed Asset Register and to check for any errors in the register .

· To provide the information regarding the procedure of disposal of particular fixed assets and give

information about the different methods through which disposal can be done. For Example: sale

by public tender, sale though company agent, donating, etc.

SCOPE OF THE PROJECT: The survey on the Project Topic “Financial savings through fixed asset management” is done by

investigating about the different Fixed Assets in Sponge Iron plant, Blast Furnace Plant and Hot Strip

Mill Plant of ISPAT INDUSTRIES LTD. situated at Dolvi plant.

The study of “Fixed Asset Management” will help to know which fixed assets are is not in active

use or idle or which are stated at the lower of their net book value. Also it helps to know which assets

are having more repairs and maintenance costs and Disposal of such Fixed Assets.

This project report may help the company to make further planning and strategy.

SALIENT CONTRIBUTION OF THE PROJECT:


Page | 25

The salient contribution of the project on “Financial savings through fixed asset management” to the

company is as follows:

· It will provide the knowledge regarding the current scenario of the company as well as provides

a competitor analysis of the fixed assets of the company.

· It will provide information to the management of the company to make strategies and planning

regarding the disposal of the fixed assets.

· It will help the management to get idea about those Fixed Assets that are obsolete or kept idle.

· It will also provide information regarding those fixed assets, which are costing heavy on the

maintenance.

· This project will help the Management to know the procedure to disposal or transfer of any Fixed

Asset. It includes the proper Fixed Asset Disposal Request form.


Page | 26

CHAPTER – 4 FIXED ASSETS AND ACOUNTING OF FIXED

ASSETS

4.1 FIXED ASSETS (DEFINITION AND CLASSIFICATION):

Fixed Assets refer to physical or tangible things of value a company owns such as facilities,

equipment, and land. The term "Fixed Assets" reflects the traditional notion that these kinds of Fixed

Assets are fixed and do not require much consideration after they are purchased.. Companies rely on

their Fixed Assets, to generate profits. Modern equipment in good repair, is essential for high

productivity and efficiency, and hence for earning profits. Fixed Assets analysis involves calculating the

earnings potential, use, and useful life of Fixed Assets.

In addition, Fixed Assets analysis determines if Fixed Assets are sufficiently maintained to ensure

current and future earning power as well as the relative profitability contributed by Fixed Assets and

Fixed Assets acquisitions. These Fixed Assets are used to derive production capacity. Therefore, they

are also known as earning Fixed Assets. Fixed Assets are purchased for continued and long-term use in

earning profit in a business. They are written off against profits over their anticipated life by charging an


Page | 27

annual amount calculated so as to eliminate the original cost less scrap, over that period. Therefore, the

business needs to make long-term investment in Fixed Assets.

Company management and stockholders expect that Fixed Assets justify their existence by

producing "returns" and so use income statement and balance sheet entries to measure the efficiency and

productivity of the company's Fixed Assets in this way, Fixed Assets that sit idle or are otherwise

unproductive are candidates for elimination. The fixed Assets are classified as follows:

I. Property, Plant And Equipment - PP&E:

A company’s Fixed Assets that is vital to

business operations but cannot be easily liquidated. The

value of property, plant and equipment is typically depreciated

over the estimated life of the Fixed Assets, because even the longest-term Fixed Assets become obsolete

or useless after a period of time. Depending on the nature of a

company's business, the total value of PP&E can range from very

low to extremely high compare to total Fixed Assets.

Accounting standard 10 deals with the accounting treatment of PP&E.

This item is listed separately in most financial statements because

PP&E is treated differently in accounting statements. This is because improvements, replacements and

betterments can pose accounting issues depending on how the costs are recorded.

II. Land:

Property or real estate, not including buildings or equipment that does not occur naturally.

Depending on the title, land ownership may also give the holder

the rights to all natural resources on the land. These may include

water, plants, human and animal life, fossils,

soil, minerals, electromagnetic features, geographical location,

and geophysical occurrences.


Page | 28

In the traditional school of economics, land is considered a factor of production, along with labor

and capital. Selling land results in a capital gain or loss. As opposed to almost any other Fixed Assets,

land is not a depreciable. Fixed Assets under IRS tax laws. The cost of land includes all expenditures

that relate to its acquisition and preparation for use. This amount typically includes purchase price,

attorney fees, real estate costs, document filing fees, and so on. Special assessments levied by a

government authority for sidewalks and streetlights or impact fees will also be included in the

capitalized cost of land, as well as general preparation costs such as grading, soil removal, drainage, and

demolition of existing buildings.

III. Building:

The cost of buildings can be determined in a

number of ways.. The allocation of cost is essential because land

represents a non-depreciable FIXED ASSETS, while the cost

of the building is depreciable. Once acquired, the building may

need some additional expenditure to make the building

ready for its intended use. These are often referred to as

make-ready costs and are included in the cost of the building.

IV. Furniture and Fixtures

Typically, a company that maintains more than 1,100

stores with an indoor lumberyard and warehouse merchandise

displays must invest heavily in furniture, fixtures, and

equipment. Narrow-aisle forklift trucks, rental vehicles,

customer shopping carts and flatbeds, and movable ladder

systems are examples of a company’s investment in

equipment.


Page | 29

Probably the most significant investment in fixtures by a retail company is evident as customers

walk between the product aisles. The heavy-gauge, steel storage systems throughout the store constitute

an enormous investment in fixtures. This racking system not only has to be strong, but much of it has to

be designed to be safe for consumers.

4.2 ACCOUNTING FOR FIXED ASSETS (AS- 10 by ICAI)

The following is the Accounting Standard 10 (AS 10) issued by the Institute of Chartered Accountants

of India on 'Accounting for Fixed Assets'.

Introduction

Financial statements disclose certain information relating to fixed assets. In many enterprises

these assets are grouped into various categories, such as land, buildings, plant and machinery, vehicles,

furniture and fittings, goodwill, patents, trademarks and designs.

Identification of Fixed Assets

Judgment is required in applying the criteria to specific circumstances or specific types of

enterprises. It may be appropriate to aggregate individually insignificant items, and to apply the criteria

to the aggregate value. An enterprise may decide to expense an item, which could otherwise have been

included as fixed asset, because the amount of the expenditure is not material.

Stand-by equipment and servicing equipment are normally capitalized. Machinery spares are

usually charged to the profit and loss statement as and when consumed. However, if such spares can be

used only in connection with an item of fixed asset and their use is expected to be irregular, it may be

appropriate to allocate the total cost on a systematic basis over a period not exceeding the useful life of

the principal item.

In certain circumstances, the accounting for an item of fixed asset may be improved if the total

expenditure thereon is allocated to its component parts, provided they are in practice separable, and

estimates are made of the useful lives of these components. For example, rather than treat an aircraft and


Page | 30

its engines as one unit, it may be better to treat the engines as a separate unit if it is likely that their

useful life is shorter than that of the aircraft as a whole.

Components of Cost

The cost of an item of fixed asset comprises its purchase price, including import duties and other non-

refundable taxes or levies and any directly attributable cost of bringing the asset to its 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:

· Site preparation;

· Initial delivery and handling costs;

· Installation cost, such as special foundations for plant; and

· Professional fees, for example fees of architects and engineers.

The cost of a fixed asset may undergo changes subsequent to its acquisition or construction on account

of exchange fluctuations, price adjustments, changes in duties or similar factors.

Ø Financing costs relating to deferred credits or to borrowed funds attributable to construction or

acquisition of fixed assets for the period up to the completion of construction or acquisition of

fixed assets are also sometimes included in the gross book value of the asset to which they relate.

However, financing costs (including interest) on fixed assets purchased on a deferred credit basis

or on money borrowed for construction or acquisition of fixed assets are not capitalized to the

extent that such costs relate to periods after such assets are ready to be put to use.

Ø Administration and other general overhead expenses are usually excluded from the cost of fixed

assets because they do not relate to a specific fixed asset. However, in some circumstances, such

expenses as are specifically attributable to construction of a project or to the acquisition of a

fixed asset or bringing it to its working condition, may be included as part of the cost of the

construction project or as a part of the cost of the fixed asset.


Page | 31

Ø The expenditure incurred on start-up and commissioning of the project, including the

expenditure incurred on test runs and experimental production, is usually capitalized as an

indirect element of the construction cost. However, the expenditure incurred after the plant has

begun commercial production, i.e., production intended for sale or captive consumption, is not

capitalized and is treated as revenue expenditure even though the contract may stipulate that the

plant will not be finally taken over until after the satisfactory completion of the guarantee period.

Ø If the interval between the date of a project on which it is ready to commence commercial

production and the date at which commercial production actually begins is prolonged, all

expenses incurred during this period are charged to the profit and loss statement. However, the

expenditure incurred during this period is also sometimes treated as deferred revenue expenditure

to be amortized over a period not exceeding 3 to 5 years after the commencement of commercial

production

Non-monetary Consideration

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.

When a fixed asset is acquired in exchange for shares or other securities in the enterprise, it is

usually recorded at its fair market value, or the fair market value of the securities issued, whichever is

more clearly evident.

Improvements and Repairs

Frequently, it is difficult to determine whether subsequent expenditure related to fixed asset

represents improvements that ought to be added to the gross book value or repairs that ought to be


Page | 32

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.

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.

Retirements and Disposals

An item of fixed asset is eliminated from the Fixed Asset Register on disposal. Items of fixed

assets that have been retired from active use and are held for disposal are stated at the lower of their net

book value and net realizable value and are shown separately in the financial statements. Any expected

loss is recognized immediately in the profit and loss statement.

In historical cost financial statements, gains or losses arising on disposal are generally

recognized in the profit and loss statement. On disposal of a previously revalued item of fixed asset, the

difference between net disposal proceeds and the net book value is normally charged or credited to the

profit and loss statement except that, to the extent such a loss is related to an increase which was

previously recorded as a credit to revaluation reserve and which has not been subsequently reversed or

utilized, it is charged directly to that account. The amount standing in revaluation reserve following the

retirement or disposal of an asset, which relates to that asset may be transferred to general reserve

Valuation of Fixed Assets in Special Cases

In the case of fixed assets acquired on hire purchase terms, although legal ownership does not

vest in the enterprise, such assets are recorded at their cash value, which if not readily available, is

calculated by assuming an appropriate rate of interest. They are shown in the balance sheet with an

appropriate narration to indicate that the enterprise does not have full ownership thereof.


Page | 33

Where an enterprise owns fixed assets jointly with others (otherwise than as a partner in a firm),

the extent of its share in such assets, and the proportion in the original cost, accumulated depreciation

and written down value are stated in the balance sheet. Alternatively, the pro rata cost of such jointly

owned assets is grouped together with similar fully owned assets. Details of such jointly owned assets

are indicated separately in the fixed assets register

Where several assets are purchased for a consolidated price, the consideration is apportioned to

the various assets on a fair basis as determined by competent valuer.

Disclosure

Disclosures that are sometimes made in financial statements include:

· Gross and net book values of fixed assets at the beginning and end of an accounting period

showing additions, disposals, acquisitions and other movements;

· Expenditure incurred on account of fixed assets in the course of construction or acquisition.

· Revalued amounts substituted for historical costs of fixed assets, the method adopted to compute

the revalued amounts, the nature of any indices used, the year of any appraisal made, and

whether an external valuer was involved, in case where fixed assets are stated at revalued

amounts.

4.3 Fixed Assets Register

Fixed Asset Register (FAR) is an accounting method used for major resources of a business.

Fixed Assets are assets such as land, machines, office equipments, buildings, patents,

trademarks, copyrights, etc. held for the purpose of production of goods or rendering of services and are

not held for the purpose of sale in the ordinary course of business.

Fixed assets constitute a major chunk of the total assets in the case of all manufacturing entities.

Even in the case of service entities such as hotels, banks, financial institutions, insurers, mobile /

telephone service providers etc. it has become imperative to invest heavily in furnishing, equipment, and


Page | 34

technology to attract, and retain customers.Just as it is important for a person investing on the NASDAQ

to know those investments, so it is important for a business entity to have a list of its fixed assets. A

Fixed Asset Register is that list of assets.

Objectives in maintaining a Fixed Asset Register (FAR):

A FAR must be kept in order to be in compliance with legislation governing corporations,

companies, etc. It allows a company to keep track of details of each fixed asset, ensuring control and

preventing misappropriation of assets. It also keeps track of the correct value of assets, which allows for

computation of depreciation and for tax and insurance purposes. The FAR generates accurate, complete,

and customized reports that suits the needs of management.

A FAR also allows a company to keep track of fixed assets that are not under simple, direct

control of the company. This means owned and leased assets, assets under construction, and imported

assets.The FAR can also be used to aid in capital budgeting and to keep track of amount provided for

Asset Retirement Obligation (ARO) in respect of each asset.

Making entries in the FAR:


Page | 35

Not all assets are capitalized. Keeping in view the concept of materiality, a company may have a

policy to capitalize only those assets which cost more than a specified amount. The companies are

required to expense all equipment whose value is below a threshold limit. Similarly, fixed assets which

have a useful life of less than one year are not capitalized.

In some companies, improvements or alterations made to an asset are capitalized separately in the

FAR. This is not correct. If such mistakes are made, it is highly probable that the auditors while

undertaking physical verification of assets will notice irreconcilable differences. Where improvements

or alterations made to an existing asset justifying capitalization, such additions should be made to the

cost of the original asset.

The format of FAR Entries:

The format / details to be provided in a FAR generally depends upon the following factors:

a) Nature of assets.

· If moveable assets constitute a significant portion of total fixed assets, details will be necessary

on their movement from one department / cost center / people to another.

· Cost of assets: Greater control and security is required for costly equipment.

b) Customized Reports on fixed assets required by management.

c) Disclosure norms / regulatory compliances as per statutory laws applicable to the entity.

d) Extent of owned, and assets taken on lease / hire purchase.

e) Requirements of insurance company.

f) Location of fixed assets:


Page | 36

If fixed assets are located at numerous locations, greater details will have to be given. In the

case of a iron and steel company, the assets are located at different area in the plant. These operational

plants maybe in different cities / countries / continents.

g) Maintenance costs.:

Some fixed assets require regular servicing to keep them running in an efficient and

satisfactory manner. It would be necessary to keep a tab on the maintenance costs, dates of servicing etc.

during a stated period. Maintenance of a FAR in a Multi-National Corporation (MNC) can be onerous and complex

due to different regulatory and compliance requirements in each country and different currencies.

Generally, an MNC sets up a subsidiary in the country in which it intends to start operations.

Maintenance of FAR is decentralized. The FAR is maintained per the company’s policy, and regulatory

requirements which are country specific. If consolidation of holding company and its subsidiaries

(whether domestic or foreign) is required by the law applicable to companies, and relevant Accounting

Standards, the task may become a bit complex. The crucial point is related to selection of exchange rate

for conversion of fixed assets. Most companies either use average annual rate or year-end exchange rate.

Similarly, for companies having their shares listed on National Stock Exchanges, the fixed

assets are required to be stated in accordance with the requirements of INDIAN generally accepted

accounting principles (INDIAN GAAP).

Identification of a fixed asset:

In a large corporation, the task of identifying and locating a specific fixed asset can be

difficult unless numbering is scientific, systematic, and up-to-date. A common problem in most

companies is the improper maintenance of the FAR. Physical verification of fixed assets becomes a

futile exercise unless the FAR is properly maintained.


Page | 37

It would be advisable to use a scientific numbering technique to identify fixed assets. The

process of numbering fixed assets is called tagging. An identification number (combination of alphabets,

and numbers) is written on the asset. Engraving the identification number on the asset is advisable in the

case of Plant & Machinery where there is heavy wear and tear.

A tag verifies the existence of assets and their location, aids in maintenance, provides a

common ground for communication between the Accounts Department and the end-users and recording

the net book value of asset in case of sale / scrapping.It is not necessary to tag all fixed assets. Land,

buildings and vehicles all have independent systems of tracking in registration papers and survey

numbers

4.4 DEPRECIATION (DEFINITION AND ITS METHODS):

Except land, all fixed assets have a limited life. During such period, due to continuous use

and/or lapse of time, the value of some assets starts decreasing. Such a gradual decrement of value of

assets is called Depreciation. Hence, depreciation can be defined as a decline in the value of an asset due

to constant use.

Since these assets have limited life, sooner or later they have to be replaced. At the time of

replacement, the business incurs heavy cash outflow, which can create liquidity

problem in that year. In order to avoid such problem, a fixed amount out of profit is set aside as

depreciation account. By the time the fixed asset expires, sufficient amount of fund will be accumulated

in depreciation account, which, then can be used to buy new asset. Hence, the process of setting aside a

fixed amount as expense in depreciation account is called Depreciation.

I. Characteristics of Depreciation

The following are some of the features of depreciation:

· Depreciation may be physical and functional.


Page | 38

· Depreciation is a gradual/permanent and continuous decrease in the utility value of a fixed asset

and it continues till the end of useful life of an asset.

· Depreciation arises due to the use of assets in productive activities.

· The primary object of depreciation is to allocate expired cost of fixed assets against a number of

accounting periods.

· Depreciation is charged in respect of fixed assets only i.e., building, machinery, equipment and

furniture etc.

· Depreciation is a charge against profit.

· Total depreciation of an asset cannot exceed its depreciable value (cost less scrap value).

II. Causes of Depreciation

Depreciation is a measure of reduction in the use-value of an asset. It can be physical deterioration or

decrease in the market value. The primary causes of depreciation are as follows:

· Wear and Tear: Due to constant use, assets get worn or torn out.

· Exhaustion: Exhaustion is the depletion of some assets due to continuous use and lapse of time.

In case of mines and oil wells, the continuous extraction of minerals or oil, a stage comes when

the mine or well gets completely exhausted an nothing is left.

· Obsolescence: Some assets are discarded before they are completely worn out because of

changed conditions. This is the case when an asset becomes usefulness

because of technological advancement, new invention, change in style etc. in that asset.

· Efflux of time: Certain assets get decreased in their value with the passage of time. This is true

in case of assets like leasehold properties, patents and copyrights etc.

· Accidents: Accidents can cause depreciation in the value of the asset.

III. Objectives of making provision for depreciation

Depreciation accounting is a must for every business for attaining the following objectives:

· To ascertain net profit: Depreciation is the expense for the business. Hence to ascertain the net

profit, it must be included in the total cost of sales.


Page | 39

· To depict the true financial position of the business: The balance sheet depicts true financial

position of a business at a point of time. To depict the true financial position of the business the

assets should be shown in balance sheet not in its original cost but at the depreciated cost. That is

all fixed assets should be shown at cost less the amount of depreciation suffered by them till the

date of the balance sheet.

· To ascertain cost of production: Depreciation is an expense. Hence it is necessary to charge

depreciation in the total cost of production to fix true sales price of the goods and service.

· Replacement of assets: One of the primary objectives of depreciation is the provision for the

replacement cost on the retirement of original assets.

· To ascertain income tax: If depreciation is not charged, the operation will show more profit. As

a result, the taxable income will be higher. Hence, depreciation is charged for the correct

ascertainment of total taxable income.

· To follow the company act: According to company act, it is compulsory to charge depreciation

on fixed assets.The depreciation rates as per companies act 1956 is as follows:

NATURE OF THE ASSET SINGLE DOUBLE TRIPLE

SHIFT SHIFT SHIFT

WDV SLM WDV SLM WDV SLM

BUILDINGS: , a.) Other Than Factory Buildings 5% 1.63% 5% 1.63% 5% 1.63%

b.) Factory Buildings 10% 3.34% 10% 3.34% 10% 3.34%

c.) Purely Temporary erection 100% 100% 100% 100% 100% 100%

PLANT AND MACHINERY: a.) Plant and machinery (not being a

ship) Other than continuous process

13.91% 4.75% 20.87% 7.42% 27.82% 10.34%


Page | 40

plant.

Cycles [NESD]. 20% 7.07% 20% 7.07% 20% 7.07%

Motor-cars, motor-cycles, scooters And

other mopeds [NESD].

25.89% 9.50% 25.89% 9.50% 25.89% 9.50%

Electrically operated vehicles 20% 7.07% 20% 7.07% 20% 7.07%

Including battery powered or

Fuel cell powered vehicles [NESD].

b. Continuous process plant. 15.33% 5.28% 15.33% 5.28% 15.33% 5.28%

Concrete pipes manufacture—

Moulds [NESD] 30% 11.31% 30% 11.31% 30% 11.31%

Drum containers manufacture—Moulds

[NESD]

30% 11.31% 30% 11.31% 30% 11.31%

Earth-moving machinery employed in

heavy construction works, such as dams,

tunnels, canals, etc. [NESD]

30% 11.31% 30% 11.31% 30% 11.31%

Moulds in iron foundries [NESD] 30% 11.31% 30% 11.31% 30% 11.31%

Motor buses and motor lorries other

than those Used in a business of running

them On hire [NESD]

30%

11.31%

30%

11.31%

30%

11.31%

Motor tractors, harvesting combines

Patterns, dies and templates [NESD]

30% 11.31% 30% 11.31% 30% 11.31%

Ropeway structures—Ropeways, ropes

andTrestle sheaves and connected parts

[NESD]

30% 11.31% 30% 11.31% 30% 11.31%

Motor buses, motor lorries and motor

taxis used in a business of running them

on hire [NESD]

40% 16.21% 40% 16.21% 40% 16.21%

Data processing machines including

Computers [NESD]

40% 16.21% 40% 16.21% 40% 16.21%

Gas cylinders including valves

andRegulators [NESD]

40% 16.21% 40% 16.21% 40% 16.21%

Iron and Steel industries—Rolling mill

rolls

100% 100% 100% 100% 100% 100%


Page | 41

FURNITURE AND FIXTURES a.) General Rates [NESD] 18.31% 6.33% 18.31% 6.33% 18.31% 6.33%

b.) Rate for furniture and fittings used in

hotels, Restaurants and boarding houses;

schools, Colleges and other educational

institutions, Libraries; welfare centers;

meeting halls, Cinema houses; theatres

and circuses; and for furniture and

fittings let out on hire for Use on the

occasion of marriages and similar

Functions {NESD}

25.88% 25.88% 25.88% 25.88% 25.88% 25.88%

VESSELS

a.) Ocean-going ships—

Dredgers, tugs, barges, survey launches

And other similar ships used mainly for

Dredging purposes [NESD]

19.80% 7% 19.80% 7% 19.80% 7%

Other ships [NESD] 14.60% 5% 14.60% 5% 14.60% 5%

b.) Vessels ordinarily operating on

inland waters—

Speed boats [NESD] 20% 7.07% 20% 7.07% 20% 7.07%

Other vessels [NESD] 10% 3.34% 10% 3.34% 10% 3.34%

NOTES to above table:

Ø “Buildings” include roads, bridges, culverts, wells and tube-wells.

Ø “Factory buildings” does not include offices, godowns, officers’ and employees’ quarters, roads,

bridges, culverts, wells and tube-wells.

Ø Where, during any financial year, any addition has been made to any asset, or where any asset

has been sold, discarded, demolished or destroyed, the depreciation on such assets shall be

calculated on a pro rata basis from the date of such addition or, as the

case may be, up to the date on which such asset has been sold, discarded, demolished or

destroyed.


Page | 42

Ø In the case of a seasonal factory or concern, the number of days on which the factory or concern

actually worked during the year or 180 days, whichever is greater;

Ø In any other case, the number of days on which the factory or concern actually worked during the

year or 240 days, whichever is greater.

Ø The extra shift depreciation shall not be charged in respect of any item of machinery or plant

which has been specifically, excepted by inscription of the letters “NESD” (meaning “no extra

shift depreciation”) against it in sub-items above .

Ø ‘Continuous process plant’ means a plant, which is required and designed to operate 24 hours a

day.

IV. Methods of Depreciation

There are a number of different methods of providing depreciation for the assets. The method of

depreciation depends on a number of factors such as type of asset, life, policy organization etc.

1.) Straight Line Method

This method is also known as Fixed Installment Method, Equal Installment Method, Original

Cost Method, Simple or Historical Cost Method. Under this method, a fixed proportion of original cost

of the asset is written-off annually so that by the time asset is worn out; its value in the books is reduced

to zero or residual value.The amount of depreciation to be charged each year can be found out as

follows:

asset of Life valuescrap estimatedasset fixed ofCost OriginalonDepreciati Annual -

=

2.) Diminishing balance method:

This method is also known as Written down Value method, Reducing Balance method.

Under this method, a fixed percentage of depreciation is charged on the reducing balance of asset (cost -


Page | 43

depreciation) till the amount is reduced to scrap value. Since a constant percentage rate is being applied

to the written down value, the amount of depreciation charged every year decreases over the life of the

asset. This method assumes that an asset should be depreciated more in earlier years of use than later

years because the

maximum loss of an asset occurs in the early years of use. The fixed percentage rate, to be applied to the

allocation of net cost as depreciation, can be obtained by following formula –

,

Where, n = Estimated useful life of the asset

CHAPTER – 5. FIXED ASSET DISPOSAL AT IIL.


Page | 44

With investments of over 13557 crores, Ispat Industries Limited is the seventh largest Indian

private sector company in terms of fixed assets. It aims to consolidate its market leadership in the

national specialty steel market by capitalizing on the proximity of its manufacturing facilities to major

consumers of flat steel products in Maharashtra, while increasing its presence in international markets

by using its convenient port location.The detailed information of Fixed Assets of ISPAT INDUSTRIES

LIMITED as on 31st March 2010 is as follows:

Schedule V for the Balance sheet for the year ended 31st mar, 2010

Fixed Assets Of IIL (Rs. In Crores)

Particulars

Gross Block Depreciation Net Block

As on 31st

Mar

2009

Additi

on Sales As on

31st

Mar

2010

Up to

31st

Mar.09

For

The

Year

On

Sales/ Additi

on

Upto

31st

Mar

2010

As at

31st

Mar.10

As at

31st

Mar

2009

Land :

Leasehold 7.7 - - 7.7 0.43 0.09 - 0.52 7.18 7.27

Freehold 125.25 1.71 - 126.96

(A)

- - - - 126.96 125.25

Total Land 132.5 1.71 - 134.66 0.43 0.09 - 0.52 134.14 132.52

Buildings 531.5 6.68 538.18

(B)

111.78 15.55 - 127.33 410.85 419.73

Railway sidings

& Loco. 59.39 - 59.39 13.78 2.9 - 16.18 43.21 46.11

Plant &

Machinery

12097.55 122.41 318.75

(D)

11901.21 4228.17 652.47 4.73 4875.91 7025.3 7869.3

8

Vessels 19.08 - 5.25 13.83 3.25 1.62 2.35 2.52 11.31 15.83

Electrical


Page | 45

Installation 621.22 7.44 2.44 626.22 27.56 1.69 283.14 343.08 363.95

Vehicles 11.96 0.51 0.62 11.85 5.89 0.85 0.41 6.33 5.52 6.06

Computers 41.2 0.97 3.27 38.9 30.17 3.02 3.1 30.09 8.81 11.03

Furniture &

Fixtures

42.54 1.04 7.19 36.39 19.34 2.68 5.81 16.21 20.18 23.2

Total 13557.39

(C)

140.76 337.52 13360.63 4669.58 706.74 18.09 5358.23 8002.4 8887.8

1

Previous Year 13167.93 620.44 230.98 13557.39 3961.92 728.1 20.44 4669.58 8887.81

Notes to above table:-

(A) Includes Rs. 3.24 crores (Rs 5.05 crores) being the cost of 84.24 acres (111.65 acres) land,which is

yet to be registered in the Company's name.

(B) Includes Rs.0.12 crore (Rs.0.12 crore) being cost of shares in Cooperative Housing Society and

Rs.0.04 crores (Rs.0.04 crores) being the cost of certain properties,which are pending registration in the

Company's name.

(C) Land,Buildings, Railway Sidings, Plant & Machinery and Electrical Installations revalued by

approved valuers on 31.03.1991, 31.03.1997, 31.03.2002, have been again revalued on Replacement

Cost basis, based on the balances of respective fixed assets as on 31st March 2006 and the net increase

of Rs. 1018.38 crores was transferred to Revaluation Reserve.

(D) Includes foreign exchange differences on long term foreign currency monetary items relating to

depreciable fixed assets de-capitalised Rs.310.53 crores (net) (Rs. 519.14 crores (net) capitalized).

The above table give us the information about the various fixed assets status as on 31st March

2010 at ISPAT INDUSTRIES LIMITED.

The company has made some disposal in the fiscal year 2009-2010. The retirement made by the

company in the three different unit namely SIP, HSM and BF are as follows:


Page | 46

Sponge Iron Plant ( Business Area 1101):

In the sponge Iron plant the Following Retirement were made

PLANT AND MACHINERY

Asset No. Description of the asset Acquisition

Amt.

Depreciation on

Asset

36002822 Dust Suppression system & IB 2,08,138.00 1,63,368.09


36002826 Dust Suppression system & IB 33,167.00 26,032.88


36000413 Dust Suppression system DSIA &

IB

6,57,039.00 5,32,152.72

TOTAL 13,17,446.00 10,50,507.98

ELECTRICAL INSTALLATION


Amount

Depreciation on

Asset

55001199 1000 KVA 3.3 K.V. Transformer 15,611.62 14,878.54

55001200 1000 KVA 3.3 K.V. Transformer 590.879.87 5,61,335.88

55001201 1000 KVA 3.3 K.V. Transformer 8,12,765.70 7,72,127.41

55001203 1000 KVA 3.3 K.V. Transformer 3,19,266.76 3,03,303.42

55001205 Cable 3.3 K.V & Termination 19,715.00 18,729.25




55000828 Battery charger & Batteries 1,49,682.12 1,09,018.47


55000830 Battery charger & Batteries 8,925.00 6500.39


55000973 3.3 KV H.T Switch board 20,947.50 15,228.37

55000974 3.3 KV H.T Switch board 33,14,109.00 24,09,279.62




Page | 47

TOTAL 69,29,057.11 54,55,301.11

VEHICLES


Amount

Depreciation on

Asset

62000040 Spendour motorcycle OR-21-0630 41,879.00 29,356.52

TOTAL 41,879.00 29,356.52

The detail total retirement made from the SIP unit in the financial year 2009-2010 is having an

acquisition cost of 82,88,382.11 INR and the total accumulated depreciation on the same assets is

65,35,165.61 INR

HOT STRIP MILL PLANT (Business Area 1102 to 1104):

In the Hot Strip Mill Plant the total retired assets were having acquisition cost of 440,05,58,620.00

INR and having a depreciation of 386,83,08,105.00 INR

BLAST FURNACE PLANT (Business Area 1111 to 1121):

There was no retirement in the Fixed Assets in Blast Furnace Area.

Ispat Industries Limited uses two different methods for discarding the Fixed Assets Of the company.

· Disposal by scrapping.

· Disposal by sale through online auction.

Disposal by scrapping:

These method of disposal is used by IIL generally to scrap the used and obsolete Equipments. Ispat

Industries Limited sale the scrap of rubber, cooper and alluminium to other companies where it can be

used as a raw material. Whereas the iron and steel metal equipment scrap are again sent to the blast

furnace and remoulded to make steel. The different equipments which are used and currently unused or

obsolete in the three main area namely SIP, BF and HSM are sent to the central stores and are stored at

the scrap yard. Then the stores deparment look after the disposal of these scrap material.


Page | 48

The detail of the spares which are scrapped in the fiscal year 2009-2010 is as follows:

Sr no Plant Material code Material Description

1 1102 SCRAP50000011 scrapped conveyor belt various sizes

2 1101 SCRAP50000012 scraped various electrical items(misc)




7 1102 SCRAP50000016 misc.rubber scrap

8 1111 SCRAP50000058 pig mould scrap

9 1102 SCRAP50000075 used & scraped grinding wheel(assorted)

10 1101 SCRAP50000081 used scrap reformer tubes

11 1102 SCRAP50000088 used & scrapped flexowell conveyor belt

12 1101 SCRAP50000099 scrap;used conveyor belt

13 1121 SCRAP50000106 discarded hammers (sinter )

14 1121 SCRAP50000108 scrap used bar,grate;327x122x30mm,f.sint

15 1102 SCRAP50000121 unusable conv.belt cutpcsscrap(below-3m)

16 1102 SCRAP50000127 scrap zebra acsr conductor

17 1102 SCRAP50000128 scrap discarded HSS roll

18 1102 SCRAP50000128 scrap discarded HSS roll

19 1102 SCRAP50000129 scrap discarded ICDP roll

20 1102 SCRAP50000130 scrap discarded high chrome roll

21 1102 SCRAP50000130 scrap discarded high chrome roll

22 1102 SCRAP50000131 scrap discarded back-up roll

23 1101 SCRAP50000077 used reformer catalyst

24 1102 SCRAP50000020 scrapped & broken graphite eletrode

*The rates of the above listed material cannot be quoted as it is the confidential data of the

company

Total Scarp in Stock = 31,283,423

Target of the month = 10,000,000

TOTAL SCRAP SALES 31st March 2010= 36,50,125.34


Page | 49

Balance Scrap To Be Sold Worth = 6,349,875

Target Min Stock to be kept only= 2,500,000

The equipment which have become obsolete due to change in the technology are stated under

obsolete criteria. The material which are in obsolete criteria is as follows

The obsolete items are classified into moving items and non-moving items. Moving items are those

which are in current use whereas non moving items are those which are idle for mor than 6 months from

the day they have been acquired.

The total cost of the items which are obsolete under moving items as per every business area is as

follow:

Business Area Total cost

Sponge Iron Plant 8,17,391.00

Hot Strip Mill PLant 1,09,11,791.00

Blast Funace Plant 1,39,220.00

Total 1,18,68,402.00

The total cost of the material which is obsolete under non moving items as per every business area is as

follow:

Business Area Total cost

Sponge Iron Plant 10,81,912.00

Hot Strip Mill Plant 32,71,488.00

Blast Furnace Plant 0.00

Total 43,53,400.00

Disposal through sale by Online Auction:

The major Plant and Machinery is not scrapped but it is sold through the online auction.These

disposal method is used to dis[pose off those fixed assets which are obsolete or which are no longer used

in the company due to technical innovation or new equipments are purchased to replace older ones.


Page | 50

The interested bidders are given an unique identification ID to quote their bid prices and the

maximum feasible prices for any particular Equipment is taken and the asset is sold.

CHAPTER – 6 SAVINGS THROUGH FIXED ASSETS

MANAGEMENT

Fixed assets management is an accounting process that seeks to track fixed assets for the purposes of

financial accounting, preventive maintenance, and theft deterrence.

Many organizations face a significant challenge to track the location, quantity, condition,

maintenance and depreciation status of their fixed assets. A popular approach to tracking fixed assets

utilizes serial numbered Asset Tags, often with bar codes for easy and accurate reading. Periodically, the

owner of the assets can take inventory with a mobile barcode reader and then produce a report.

Off-the-shelf software packages for fixed asset management are marketed to businesses small

and large. Some Enterprise Resource Planning systems are available with fixed assets modules.

Some tracking methods automate the process, such as by using fixed scanners to read bar

codes on railway freight cars or by attaching a radio-frequency identification (RFID) tag to an asset

Asset Lifecycle Management means asset decisions should be made with cost consideration over the

asset life from planning through the disposal.. So the entire practice of acquiring, using, and getting rid

of Fixed Assets is known as “Fixed Assets Life Cycle Management”.The flow chart of how to minimize

the cost by managing the Fixed Asset

properly is as follow:


Page | 51

Assets may be abandoned, sold, or exchanged. In any case, it is first necessary to fully update all

depreciation calculations through the date of disposal. Then, and only then, the asset disposal would be

recorded. If the asset is simply being scrapped (abandoned), the journal entry entails only the

elimination of the cost of the asset from the books, removing the related accumulated depreciation, and

recording a loss to balance the journal entry. This loss reflects the net book value that was not

previously depreciated:

Accumulated Depreciation 75,000

Loss 25,000

Equipment 100,000

*Abandoned equipment costing $100,000. The equipment

was 75% depreciated on the date of disposal.

On the other hand, an asset may be disposed of by sale, in which case the journal entry would need to

be modified to include the proceeds of the sale. Assume the above asset was sold for $10,000.

Logically, the loss would be reduced by this amount, and the entry would be as follows:


Loss 15,000

Cash 10,000

Equipment 100,000

*Sold equipment costing $100,000 for $10,000. The

equipment was 75% depreciated on the date of sale.

While the journal entry may be sufficient to demonstrate the loss calculation, you might also consider

that an asset with a $25,000 net book value ($100,000 cost minus $75,000 accumulated depreciation) is


Page | 52

being sold for $10,000 -- which gives rise to the loss of $15,000.Conversely, what if this asset were sold

for $30,000? Here is the entry for that scenario:


Cash 30,000

Gain 5,000

Equipment 100,000

*Sold equipment costing $100,000 for $30,000. The equipment was

75% depreciated on the date of sale.

The specific activities and goals involved in life cycle management differs among different kinds of

FIXED Assets, but generally FIXED ASSETS life cycle management makes use of best practice

methods for planning, accounting, deployment, usage, and maintenance, in order to reach these

objectives for the organization's collection of FIXED Assets:

· Ensure FIXED ASSETS availability where and when needed.

· Minimize the risk of FIXED ASSETS failure or breakdown before the end of FIXED ASSETS

economic life.

· Maximize the return (gains) from the FIXED ASSETS.

· Ensure that FIXED Assets are used productively throughout the FIXED Asset’s economic life,

and they are not wasted or idle. This may involve working with other management to improve or

re-design processes that impact FIXED ASSETS utilization and FIXED ASSETS productivity.

· Sell or otherwise divest the FIXED Assets that are idle or unproductive.

· Set priorities for FIXED Asset’s acquisition and replacement and plan future expansion or

reduction of the FIXED Asset base.

· Reaching these objectives requires good knowledge of:

· Expected gains or returns from the FIXED ASSETS.

· FIXED Asset’s lifecycle, total cost of ownership, including maintenance costs and operating

costs.


Page | 53

· Advancements and the current state of technology for the FIXED ASSETS class. This is

obviously true for computing FIXED Assets, of course, but is also important for

· Any major FIXED Asset class based on constantly improving technologies, such as medical or

laboratory equipment.

· FIXED Assets subject to changing requirements for fuel efficiency or emissions.

· FIXED ASSETS reliability and or/risks to FIXED ASSETS availability

· Available choices in FIXED ASSETS leasing vs. buying, and the implications of each approach

in terms of upgrade/replacement flexibility, responsibility for maintenance, position either on or

off the balance sheet, and potential tax liabilities and tax savings.

· The FIXED Asset’s depreciable life and its economic life.

6.1.) HOW FINANCIAL SAVINGS CAN BE DONE THROUGH DISPOSAL OR

REPLACEMENT OF FIXED ASSETS:

The Fixed Asset disposal and replacement should be based on facts and figures. The judgment,

which the Owner- Financial Manager of a company makes, should be the result of weighing the costs of

keeping the old equipment against the cost of its replacement.

Sooner or later, you must decide whether you should keep an existing unit of equipment or

dispose it off or replace it with a new unit. As time goes by, equipment deteriorates and becomes

obsolete. Frequent breakdowns occur, defective output increases, unit labor costs rise, and production

schedules cannot be met. At some point, these occurrences become serious enough to cause you to

wonder whether or not you should replace or dispose the equipment.

To recognize the better alternative you need to know the total cost of each alternative - keeping

the old equipment or buying a replacement. Once these costs are determined, you can compare them and

identify the more economical equipment. The paragraphs that follow discuss the individual costs, which

you must consider when computing the total cost of the old and new equipment.

i.) Depreciation


Page | 54

One of the costs connected with any type of equipment is depreciation. For cost comparison

purposes, depreciation is simply the amount by which an asset decreases in value

over some period of time. For example, if you bought a piece of equipment for $20,000 and sold it for

$6,000 after seven years of service, you would say that the depreciation during the

seven-year period was $20,000 minus $6,000, or $14,000. This $14,000 was one of your costs of owning

the equipment for that period. From this, it follows that when considering equipment replacement, you

must calculate the future depreciation expense that you will experience with both the old and the new

equipment.

In so far as the new equipment is concerned, this calls for knowing certain things about the

equipment. You need to know (1) its first cost, (2) its estimated service life, and (3) its expected salvage

value. The difference between the first cost and the salvage value will represent the amount by which the

equipment will depreciate during its life - that is, during the time you expect to use it.

You determine the depreciation expense for the old equipment in the same general way but for

one import difference. So to determine the actual future depreciation expense that will be experienced

with the old equipment, you must know (1) its present market value, (2) its estimated remaining service

life, and (3) its expected salvage value at the end of that life. The difference between the present market

value and the future salvage value represents the amount by which the equipment will depreciate during

its remaining life in your business.

ii.) Interest

In addition to depreciation, every piece of equipment generates an interest expense. This

expense occurs because owning an asset ties up some of your capital. If you had to borrow this capital

you would have to pay for the use of the money. This "out-of-pocket" cost is one of the costs of owning


Page | 55

the equipment. In this case, the amount involved is no longer available for other investments, which

could bring you a return. This "opportunity cost" is one of the costs of owning the equipment.

To cite an example, suppose that the market value of an asset during a given year is $10,000.

Suppose also that at the same time, you are getting capital at a cost of 15 percent per year. On the other

hand, suppose that if you converted the asset into cash, you could invest

the money and realize a rate of return of 15 percent per year. In either case, a decision to own that asset

during that year would be costing you 15 percent of $10,000, or $1,500 in interest.

iii.) Operating Costs

There is a third type of cost - the cost of operation - that is experienced with a piece of

equipment. Typical operating cost are expenditures for labor, materials, supervision, maintenance, and

power.

This cost must be considered because your choice of equipment affects them. You may find it

convenient to estimate these costs on an annual basis. You can get figures for each unit of equipment by

estimating its next-year operating costs as well as the annual rate at which these costs are likely to

increase as wage rates rise and the equipment deteriorates.

For example, you might say that operating cost for the new equipment are likely to be

$16,000 during the first year of its life. You might also estimate that after the first year, the operating

costs will increase at a rate of $500 a year.

iv.) Revenues

When this is true, revenues can be ignored for the same reason that you can ignore equal

operating costs.

But if revenues are affected by the choice of equipment, they must be considered. For example,

you might estimate that the higher quality of output from the new equipment will increase annual sales


Page | 56

by $1,200. You can handle this difference in revenues in either of two ways. One way is to show the

$1,200 as an additional annual cost that will be experienced with the old equipment.

The other way is to treat the $1,200 as a negative annual cost and associate it with the new

equipment. The total cost, which you calculate, will be affected by your choice of method, but the

difference between this costs will remain the same.

An Annual Average Cost

In brief, you can make the necessary cost analysis equipment only after you have the proper data

for each The data include market value, remaining service life, future salvage value, and operating costs.

In addition, for both alternatives, the cost of money must be stated in the form of an interest rate. By

using these data, you can determine the elements of the total costs. These elements consist of

depreciation expense, interest expense, operating costs, and possibly lost revenues. Now, it so happens

that these costs can be expressed in a variety of ways.

However, the simplest way for cost comparison purposes is to describe these cost elements in

terms of an average annual cost. Doing so permits you to calculate and compare the total average annual

costs of the old and new equipment and reach a decision.

How these costs can be computed is shown in the example that follows.

Look first at some facts about an old piece of equipment. It has a market value of $7,000. If

retained, its service life is expected to be four years, and its salvage value is expected to be $1,000.

Next-year operating costs are estimated to be $8,000 but will probably increase at an annual rate of

$200. The cost of money is 12 percent per year. With this set of figures, you can obtain the total average

annual cost of the alternative of keeping this equipment.


Page | 57

Annual Depreciation Expense: You begin by calculating the equipment’s average annual depreciation

expense. You do this by determining the total depreciation and dividing that amount by the asset's four-

year life. Your answer is $1,500, which you get as follows:

$7,000 - $1,000

Annual depreciation = ________________ = $1,500

4

Annual Interest Expense: Next, you calculate the average annual interest expense. The maximum

investment in the equipment is $7,000, its present market value. But as time goes by, the investment in

the asset decreases because its market value decreases. The minimum

investment is reached at the end of the equipment's life when it has a salvage value of $1,000. The

average investment will be the average of these maximum and minimum values. You calculate it as

follows:

$7,000 + $1,000

Average investment = _________________ = $4,000

2

To determine the average annual interest expense, you multiply the average investment ($4,000, in this

example) by the annual interest rate of 12 percent. Doing so yields:

Annual Interest = $4,000 x 0.12 = $480

Annual Operating Costs: You can determine the average annual operating costs by computing the

average of the individual annual operating costs. In this example, they are estimated to be $8,000,

$8,200, $8,400, and $8,600. The average for these figures is $8,300, which you obtain as follows:

$8,000 + $8,200 + $8,400 + $8,600

Annual operating costs =_________________________________ = $8,300

4


Page | 58

Total Average Annual Cost: For the old equipment, the total average annual cost is simply the sum of

the calculated average annual cost for: (1) depreciation, (2) interest, and (3) operating expenses. This

sum is $10,280, as shown below.

Item average annual cost = Depreciation $1,500 + Interest 480 + Operating Costs 8,300 = Total $10,280

These are some of the costs that are attached to the fixed assets such as Plant and Machinery and if a

particular Asset is kept Idle then it may add on these costs without contributing to the production. So the

fixed asset, which are idle or not used in operational process must be disposed which, can result in

financial savings.

6.2) IMPAIRMENT OF THE FIXED ASSETS (AS 28 by ICAI)

Fixed Assets to be held and used:

Businesses recognize impairment when the financial statement-carrying amount of a long-lived

asset or asset group exceeds its fair value and is not recoverable. A carrying amount is not recoverable if

it is greater than the sum of the undiscounted cash flows expected from the asset’s use and eventual

disposal. FASB defines impairment loss as the amount by which the carrying value exceeds an asset’s

fair value.

Financial Managers need not check every asset an entity owns in each reporting period. When

circumstances change indicating a carrying amount may not be recoverable, Financial Manager’s should

test the asset for impairment. A test may be called for when one or more of these events occur:

· A significant decrease in the market price of a long-lived asset.

· A significant change in how a company uses a long-lived asset or in its physical condition.

· A significant change in legal factors or in the business climate that could affect an asset’s value,

including an adverse action or assessment by a regulator (such as if the EPA rules that a

company is polluting a stream and must change its manufacturing process, thereby decreasing

the value of its plant or equipment).

· An accumulation of cost significantly greater than the amount originally expected to acquire or

construct a long-lived asset.


Page | 59

· A current-period operating or cash flow loss combined with a history of such losses or a forecast

demonstrating continued losses associated with use of a long-lived asset.

· An expectation the entity will sell or otherwise dispose of a long-lived asset significantly before

the end of its previously estimated useful life.

Testing Fixed Assets for recoverability:

Financial Manager should test an asset for recoverability by comparing its estimated future

undiscounted cash flows with its carrying value. The asset is considered recoverable

when future cash flows exceed the carrying amount. No impairment is recognized. The asset is not

recoverable when future cash flows are less than the carrying amount. In such cases the company

recognizes an impairment loss for the amount the carrying value exceeds fair value.

The estimated cash flows a Financial Manager uses to test for recoverability must include only

future flows (cash inflows less cash outflows) directly associated with use and eventual disposal of a

given asset. The company should exclude interest charges it will expense as incurred. Cash flow

estimates are based on the entity’s assumptions about employing the long-lived asset for its remaining

useful life. When an asset group consists of long-lived assets with different remaining useful lives,

determining the group’s life is critical to estimating cash flows. Remaining useful life is based on the life

of the primary asset—the most significant asset from which the group derives its cash flow generating

capacity. The primary asset must be the principal long-lived tangible asset being depreciated (or

intangible asset being amortized).

Financial Managers should consider these factors when determining which is the primary asset:

· Whether the entity would have acquired other assets in a group without this asset.

· The investment required to replace the asset.

· The asset’s remaining useful life relative to other assets in the group.

If the primary asset does not have the longest remaining life of the group, the cash flows from

operating the group still are based on that asset’s estimated life—on the assumption the company will

dispose of the entire group at the end of the primary asset’s life. Future cash flows must be based on the


Page | 60

asset group’s current service potential (four years for the three assets above) at the date of the

impairment test. Future cash flows should include expenditures to maintain the current service potential,

including replacing component parts of the long-lived asset and assets other than the primary one.

Financial Manager should exclude cash flows that increase service potential but include maintenance

costs.

Estimating Fair Value of an Fixed Asset:

Fair value is an asset’s purchase or sale price in a current transaction between willing parties.

The best evidence of fair value is prices quoted in active markets, such as the price for a stock listed on a

stock market. Financial manager must use this amount to value assets if it is available. Because market

prices are not available for many long-lived assets such as equipment, fair value estimates must be based

on the best information available, including prices for similar assets. While inanacial manager can use

other valuation techniques, present value is often the best for estimating fair value.

Disclosing Impairment Losses:

When a company recognizes an impairment loss for an asset group, it must allocate the loss to

the long-lived assets in the group on a pro rata basis using their relative carrying amounts. There is an

exception when the loss allocated to an individual asset reduces its carrying amount below fair value. If

Financial Manager can determine fair value without undue cost and effort, the asset should be carried at

this amount. This requires an additional allocation of the impairment loss (explained below). The

adjusted carrying value after the allocation becomes the new cost basis for depreciation (amortization)

over the asset’s remaining useful life.

A business must include an impairment loss in the income from continuing operations before

income taxes line on its income statement. (A not-for-profit organization (NPO) would include the loss

in income from continuing operations in the statement of activities.) When a subtotal such as income


Page | 61

from operations is present, Financial Manger should include the impairment loss in determining that

amount.

Other required information companies must disclose in the notes to the financial statements includes

· A description of the impaired long-lived asset and the facts and circumstances leading to its

impairment.

· If not separately presented on the face of the statement, the amount of the impairment loss and

the caption in the income statement or the statement of activities that includes the loss.

· The method or methods used to determine fair value.

Fixed Assets Disposed of Other than by Sale:

A company must continue to classify long-lived assets it plans to dispose of by some method

other than by sale as held and used until it actually gets rid of them. Other disposal methods include

abandonment, exchange for a similar productive asset or distribution to owners in a spin-off.

A company should report long-lived assets to be abandoned or distributed to owners that

consist of a group of assets (and liabilities) that are a “component of an entity” in the income statement

as discontinued operations. If the assets are not a component, Financial Manager should report their

disposal as part of the company’s income from continuing operations.

Statement no. 144 defines a component of an entity as operations and cash flows that can be

clearly distinguished both operationally and for financial reporting purposes from the rest of the entity.

A component may be a

· Reportable segment or an operating unit,.

· A reporting unit

· A subsidiary or an asset group as “assets to be disposed of together as a group in a single

transaction and liabilities directly associated with those assets that will be transferred in the

transaction.”

A long-lived asset a company will abandon is considered disposed of when the company

stops using it. A temporarily idle asset is not accounted for as abandoned. If an entity plans to abandon a


Page | 62

long-lived asset before its estimated useful life, it will treat the asset as held and used, test it for

impairment and revise depreciation estimates in accordance with Opinion no. 20. Continued use of such

a long-lived asset demonstrates service potential (the unit is useable), and hence, fair value would be

zero only in unusual circumstances. During use before abandonment, the company should depreciate the

asset so that at disposal or

abandonment, its carrying value equals its salvage value. This amount should not be less than zero. A

long-lived asset to be distributed to owners or exchanged for a similar productive asset is considered

disposed of when it is distributed or exchanged. When the asset is classified as held and used, any test

for recoverability must be based on using the asset for its

remaining useful life, assuming disposal will not occur. If the carrying amount exceeds fair value at

disposal, the company must recognize an impairment loss.

Fixed Assets to be sold:

A company must classify a long-lived asset it will sell as held for sale in the period it meets all of these

criteria:

· Management with the authority to approve the action commits to a plan to sell.

· The asset is available for immediate sale in its present condition, subject only to terms that are

usual and customary when selling such assets.

· The company has initiated an active program to locate a buyer.

· The sale is probable and the asset transfer is expected to qualify as a completed sale within one

year (there are some circumstances beyond the entity’s control that may extend the time for

completion beyond one year).

· The company is actively marketing the asset at a reasonable price in relation to its current fair

value.

If the company meets the above criteria after the balance-sheet date but before it issues its

financial statements, it must continue to classify the asset as held and used. In the notes to the financial

statements, the company must disclose the facts and circumstances leading to the expected disposal, the

likely manner and timing of the disposal and—if not separately shown on the face of the statement—the


Page | 63

carrying amount(s) of the major classes of assets and liabilities included in the disposal group. If the

company tests the asset for recoverability at the balance-sheet date, it should do so on a held-and-used

basis. Future cash flow estimates used to test for recoverability must take into account the possible

outcomes that existed at the balance-sheet date, including a future sale. Financial manager should not

revise this assessment for a sale decision made after the balance-sheet date and should collect

documentation and supporting evidence on a timely basis for events near such a date. An

impairment loss is calculated and reported in the same way it is for assets held and used because this is

the asset’s status at the balance-sheet date.

Companies must adjust the carrying amounts of assets (including goodwill) that are part of a

disposal group classified as held for sale not covered by Statement no. 144 in

accordance with other applicable GAAP before measuring the group’s fair value. A long-lived asset held

for sale must be measured at the lower of its carrying amount or fair value less cost to sell—the

incremental direct costs the company would not have incurred if not for the decision to sell. Examples of

such costs include broker commissions, legal and title transfer fees and closing costs necessary to

transfer title. Exclude expected future losses from operations. Assets classified as held for sale are not

depreciated or amortized.

Reporting Discontinued Operations:

An entity must report the results of operating a component it has either disposed of or

classified as held for sale in discontinued operations if it meets both of these conditions:

The component’s operations and cash flows have been or will be eliminated from the ongoing

operations as a result of the disposal.

The entity will not have any significant continuing involvement in the component’s

operations after the disposal.

Presentation and Disclosure


Page | 64

A company must present a long-lived asset held for sale separately in its financial

statements. Major classes of assets and liabilities held for sale must not be offset and presented as one

amount, they must be separately disclosed either on the face of the statement itself or in the notes.

Statement no. 144 requires a company to disclose information in the notes for a period in which it either

sells a long-lived asset or classifies it as held for sale. Companies must disclose

· The facts and circumstances leading to the expected disposal, the likely manner and timing and,

if not separately presented, the carrying amount(s) of major classes of assets and liabilities

included in the disposal group.

· The loss recognized for any initial or subsequent write-down to fair value less cost to sell or a

gain not more than the cumulative loss previously recognized for a write-down to fair value less

cost to sell.

· The gain or loss on sale of the long-lived asset. Financial manager should do this if these gains

and losses are not separately presented on the face of the income statement, the caption in the

income statement or statement of activities.

· If applicable, the revenue and pretax profit or loss reported in discontinued operations.

· If applicable, the segment in which the long-lived asset is reported under Statement no. 131.

· If an entity decides not to sell a long-lived asset previously classified as held for sale, or removes

an asset or liability from a disposal group, it must describe in the notes the facts and

circumstances leading to the change in plan and its effect on operations for that period and any

prior period presented.

6.3.) FIXED ASSET DISPOSAL PROCEDURE: The fixed assets that are not being used or that are obsolete or that are beyond repairs are to

be disposed off through submission of Form ADR to physical plant. The actual disposal or transfer of

fixed assets between departments should not occur without the ADR form. Assets cannot be removed or

disposed from the department without properly executed ADR signed by the Department Head.


Page | 65

I.) The Following steps are required during Asset Disposal/Scrapping process in Fixed Asset

accounting module

Step1: Prepare asset disposal request form

Requesting Dept. and authorized personnel review and approve Requesting department

prepares asset disposal request documents for review and approval of authorized personnel.

Step2: Receive & review approved asset disposal documents

Asset maintenance department receives and reviews asset disposal request approved by

authorized personnel.

Step3: Contacts 3rd party buyer

Asset maintenance department contacts interested buyer.

Step4: Prepare Tax Invoice

Finance Personnel Asset maintenance department requests preparation of tax invoice from

Finance personnel. This applies only to sale to third party.

Step5: Submit disposal documents to Finance

Asset maintenance department submits to Finance A/A personnel all approved disposal

documents.

Step6: Verify disposal documents against tax invoice

Asset personnel verify supporting documents to ensure that there is no discrepancy between

invoice and disposal documents. This applies only to sale of assets.

Step7: Perform asset retirement

Asset personnel perform asset retirement in Asset Accounting module.

II.) Reasons for Disposal

Items can be available for disposal because they are:


Page | 66

· Required to be disposed of under a particular policy eg. Motor vehicles

· No longer required due to changed procedures, functions or usage patterns;

· Occupying storage space and not being needed in the foreseeable future;

· Reaching their optimum selling time to maximize returns;

· No longer complying with occupational health and safety standards;

· Found to contain hazardous materials (Disposal of such items should only be carried out after

prior discussion with the Manager, OH&S); and/or

· Beyond repair but able to be sold for scrap. Responsibilities of Head of Unit

III.) A Sample of Asset Disposal Request Form is as under

ASSET DISPOSAL / TRANSFER REQUEST FORM 1. DEPARTMENT NAME:

SIGNATURE

2. DATE 3.BAR CODE

4.SERIAL NO.

5. BRAND MAKE 6. MODEL 7. PURCHASE DATE 8. COST

9. DESCRIPTION OF THE ASSET

10. REASONS FOR DISPOSAL

o NOT WORKING BEYOND REPAIR

o OBSOLETE

o TRADE IN

o NO LONGER NEEDED

o OTHER REASON PLEASE EXPLAIN IN

DETAIL-------

…………..………………………………………

………

PURCHASE ORDER NO.

COMMENT

TRANFER EMPLOYEE ACCEPTING RESPONSIBILITY OF ABOVE ITEM TRANSFERRED TO DATE:


Page | 67

SIGNATURE OF THE EMPLOYEE RECEIVING ASSET

TRANSFER APPROVED BY DEPARTMENT HEAD

COMMENTS:

DISPOSAL – BY MY SIGNATURE I REPRESENT UNDER OATH THAT THE ABOVE FACTS ARE TRUE AND CORRECT TO THE BEST OF MY KNOWLEDGE.

REASON FOR DISPOSAL DATE:

APPROVED BY: COMMENTS

CENTRAL OFFICE USE ONLY: PICKED UP BY

DATE:

DATE APPROVED FOR DISPOSAL BOARD OF

TRUSTEES

RECORDED DELETION/ TRANSFER FIXED

ASSETS INVENTORY RECORDS BY:

IV.) Options For Disposal Of Assets

1. Assets identified for disposal may be dispensed with using the procedures below. Acceptable

methods of disposal are:

· Sale by public tender.

· Private Sale.

· Donated to a community service organization.

· Private sale by an agent acting for the Company.

· Transfer of the asset to another unit of the Company.

· Trade-in.

· Junked or destroyed or cannibalized.

2. Choice of the most appropriate disposal option will normally be influenced by the nature of the

goods for disposal and by their location and market value.

3. In all cases, assets disposed of must be reported on an 'Asset Disposal' form to ensure they are

removed from the central asset register.


Page | 68

A more detailed description of each disposal option is set out below:

o Sale by Public Tender

Public tender must dispose of items with an initial cost of $10,000 or more unless the item

is more than 10 years old. Tender where the items are known to have a market value but the amount

is unclear may dispose of other items.

Tendering is the most expensive disposal procedure and should only be undertaken where

there is a clear net return to the Company] from such a process.

o Private Sale

Private sale involves assigning a price to the item(s) and publicizing the items availability

for sale and the price is a suitable manner. This may range from a newspaper advertisement to a

general email notice.

To ensure a fair price is paid in the case of a private sale, an independent person (outside the Unit

concerned and with appropriate expertise E.g. Information Technology Services

(ITS) in the case of computers) should be involved and confirm that the sale price is appropriate.

Prospective buyers should be given adequate opportunity to inspect the goods prior to

sale. Collection or forwarding of the goods is normally contingent on the presentation to the

Company] of evidence of payment of the sale price. The item may on receipt of an offer, be sold to

the first person to make such an offer. The provision relating to the sale of items to staff as outlined

in section 1, paragraph 8 above must be observed.

o Donations

Where the Company has determined that goods have no residual value, and where their

disposal is therefore unlikely to produce offsetting revenue, it may authorize the donation of the

goods to another organization.


Page | 69

Ideally, such donations should be to organizations and not to individuals. Organizations

with a community service role are recommended. This includes schools, charities and volunteer

organizations.

A delegated approving officer must approve donations and there must be confirmation

by Financial Services that the goods have no residual value and no significant market value.

o Using disposal agents

A unit may in some circumstances engage an agent to undertake the disposal by sale of

goods. Where an agent is to undertake sales on behalf of the Company, it is important to advise the

agent, in writing, of the Company's instructions relating to the sale. Information might include

timeframe for sale, target revenue, condition and location of assets, reserve price, and end-user

restrictions.

This advice is the formal agreement or contract with the agent and constitutes the

authority for the agent to undertake the sale in accordance with the Company's requirements. An

authorized officer should sign the advice.

o Transfer to another Unit

In some cases, an asset may have no use for one unit but may be of value to another unit

within the organization. In such case, the asset may, with the agreement of both Units be transferred.

Such transfer may be at no cost to either unit or entail a fee or price negotiated by the two units

concerned.

o Trade-In

Items may be traded in where this maximizes the net return to the Company. The asset

number of the item traded-in and the value of the trade-in should be shown on the Purchase Order.

o Destroyed or Cannibalized Plant and Equipment

Items with no market value and no use to any other organization or person may be

destroyed in an appropriate and safe manner.


Page | 70

An Asset Disposal Form must be completed and authorized by the Head of Unit and forwarded to

Financial Services for updating the central asset register.

CHAPTER – 7 RESEARCH METHODOLOGY

RESEARCH METHODOLOGY

This report is based on primary as well secondary data, however primary data collection was

given more importance since it is overhearing factor in attitude studies. One of the most important users

of research methodology is that it helps in identifying the problem, collecting, analyzing the required

information data and providing an alternative solution to the problem .It also helps in collecting the vital

information that is required by the top management to assist them for the better decision making both

day to day decision and critical ones.


Page | 71

A.) DATA SOURES:

Research is based on primary data as well as secondary data. The secondary Data source plays a

major role in the Research. Research has been done by primary data collection, and interacting with

various people has collected primary data. The secondary data has been collected through various

journals and websites.

Duration of Study:

The study was carried out for a period of two months, from 3rd May to 29th July 2010.

B.) SAMPLING:

Sampling procedure:

The sample was selected of them who are the employees of the ISPAT INDUSTRIES LTD. DOLVI,

RAIGAD. It was also collected through personal visits to persons, by formal and

informal talks and through filling up the questionnaire prepared. The data has been analyzed by using

mathematical/Statistical tool.

Sample size:

The sample size of my project is limited to 50 people only.

Sample design:

Data has been presented with the help of bar graph, pie charts, line graphs etc.


Page | 72

CHAPTER – 8 DATA ANALYSIS AND INTERPRETATION

8.1.) ANALYSIS OF THE COMPANY: Based on the Financial Results and the Annual Report of IIL the following analysis was made to check

whether is there any need for Disposal of Fixed Asset or not.

I.) NET FIXED ASSETS TO NET WORTH RATIO:


Page | 73

Definition:

A fixed asset to proprietor’s fund ratio establishes the relationship between fixed assets and

shareholders funds. The purpose of this ratio is to indicate the percentage of the owner's funds invested

in fixed assets.

Formula:

Significance of this Ratio:

The ratio of fixed assets to net worth indicates the extent to which shareholder's funds

are sunk into the fixed assets. Generally, the purchase of fixed assets should be financed by

shareholder's equity including reserves, surpluses and retained earnings. If the ratio is less than 100%, it

implies that owners funds are more than fixed assets and a part of the working capital is provide by the

shareholders. When the ratio is more than the 100%, it implies that owner’s funds are not sufficient to

finance the fixed assets and the firm has to depend upon outsiders to finance the fixed assets.

A trend analysis of this ratio is done taking into consideration the financial results and the annual

report of last five years of ISPAT INDUSTRIES LTD. The trend analysis of the NET FIXED ASSET

TO NET WORTH of the Ispat Industries Ltd shows the following trend:

(rs in crores)

Net Fixed Asset To Net Worth Ratio

Year Net Fixed Assets Net Worth Net Fixed Asset To Net Worth

2006 8901.44 2049.81 4.34:1


Page | 74

Interpretation:

It has been observed that Net Fixed Asset to Net Worth ratio is above 1:1 for Ispat Industries

Ltd. which implies that the shareholders funds are not sufficient to finance the Fixed Assets and the

company has to depend on outsiders funds or borrowed funds to finance the fixed assets which results in

increase in interest amt. The trend analysis of this ratio for last five year is showing a downward trend

which is a good sign for a company but Net Fixed Asset to Net worth ratio must be below 1:1 then only

it can said that it is perfect. The current ratio of Net Fixed asset to Net woth is 2.13:1,but either the fixed

assets are to reduced or the net worth should be increased to match with industry averages. The ideal net

worth to net fixed assets ratio is 0.65:1.

II) FIXED ASSET TURNOVER RATIO:

Definition

4 .3 4 4 . 2 83 . 1 7

4 . 3 6

2 . 1 3

012345

2006 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0

N e t W o r t h T o N e t F i x e d a s s e t s o f I I L

N e t W o r t h t o N e t F i x e d a s s e t s

2007 9823.33 2294.16 4.28:1

2008 9206.01 2901.61 3.17:1

2009 8887.81 2036.82 4.36:1

2010 8002.40 3744.19 2.13:1


Page | 75

This ratio indicates how well the business is using its Fixed Assets to generate its sales. Higher

the ratio better for the company as a high ratio indicates the business has less money tied up in Fixed

Assets for each Rupee of the sales revenue. Measure of the productivity of a firm, it indicates the

amount of sales generated by each dollar spent on fixed assets, and the amount of fixed assets required

to generate a specific level of revenue. Changes in this ratio over time reflect whether or not the firm is

becoming more efficient in the use of its fixed assets.

Formula:

Significance of the Ratio

The Fixed Asset Turnover Ratio helps the financial manager to know whether the amount of

sales generated by each rupee spent on fixed assets, and the amount of fixed assets required to generate a

specific level of revenue.

The Fixed Asset turnover Ratio of Ispat Industries Ltd. based on the financial data of past five years is as

follows:

(rs in crores)

FIXED ASSET TURNOVER RATIO

Year Total Sales revenue Net Average Fixed Assets Fixed Asset turnover

ratio

2006 5010.73 7535.69 0.66:1

2007 7595.49 9362.38 0.81:1

2008 8711.00 9514.67 0.91:1


Page | 76

2009 8537.84 9046.91 0.94:1

2010 7782.86 8445.10 0.96:1

The average Net Fixed Asset is calculated as follows:

Interpretation:

It has been observed that the higher the ratio better for the company as a high ratio indicates the

business has less money tied up in Fixed Assets for each Rupee of the sales revenue. In case of Ispat

industries ltd the ratio shows an increasing trend, which is a good sign for the company but till date it

has not achieved 0.99 yield. The Fixed Asset Turnover Ratio has increased from 0.66 in 2006 to 0.96 in

2010 i.e. every single rupee invested in Fixed Asset can generated sales of 96 paise.

0.660.81

0.91 0.94 0.96

00.20.40.60.8

11.2

2006 2007 2008 2009 2010

Fixed Asset Turnover Ratio of IIL

Fixed Asset Turnover Ratio


Page | 77

III) RETURN ON FIXED ASSET:

Definition:

Return on fixed asset ratio is a comparison of net profit before interest and tax to the fixed

assets. This ratio helps the financial manager to know how much profit is generated from every Re.

Invested in the Fixed Assets.

Formula:

(rs in crores)

RETURN ON FIXED ASSETS (ROFA)

Year Net Profit Before Interest and

Tax

Average Net Fixed

Assets

ROFA

2006 - 241.23 7535.69 - 3.20 %

2007 993.52 9362.38 10.61 %

2008 960.89 9514.67 10.09 %

2009 782.47 9046.91 8.64 %

2010 756.27 8445.10 8.95 %


Page | 78

Interpretation:

The ROFA in case of Ispat Industries shows very unstable growth. In 2006 there was a negative

ROFA i.e. – 3.20 %, which was increased to 10.61 % in the successive year and

records again a drop in 2008. Currently the Return on Fixed Asset is 8.95% in the year 2009-10. This

shows that the fixed assets are not properly utilized to produce more returns. The fixed assets should

minimum produce atleast 25% return.

IV) REPAIRS AND MAINTENANCE TO FIXED ASSET RATIO:

Definition:

The ratio is defined as the comparison of repairs and maintenance to the fixed asset. This ratio

helps us to know the Maintenance & Repairs Cost on a particular Fixed Asset. It enables us to know the

company’s capacity to invest in the repairs and Maintenance on the particulars Fixed Asset.

-3.20%

10.61% 10.09%8.64% 8.95%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

2006 2007 2008 2009 2010

Return from every rupee invested in fixed assets

Return on fixed asset ratio

Return on fixed asset (ROFA)


Page | 79

Formula:

(rs in crores)

Maintenance & Repair Expenses To Fixed Asset Ratio

Year Maintenance & Repairs expense Gross Fixed Asset Ratio

2006 79.83 10996.05 0.72 %

2007 123.31 12425.00 0.99 %

2008 158.95 12521.80 1.27 %

2009 160.26 12892.94 1.24 %

2010 130.39 12687.79 1.03 %

Note: The gross fixed asset includes the fixed asset excluding the land and building and also the

repair & Maintenance of the same is not taken into consideration, as the company will not be

disposing the land and building.

0.72%

0.99%1.27% 1.24% 1.03%

0.00%0.20%0.40%0.60%0.80%1.00%1.20%1.40%

2006 2007 2008 2009 2010

Maintenance & Repairs to Fixed Asset Ratio


Page | 80

Interpretation:

The Maintenance & Repairs Expenses compared to Fixed Assets shows an increasing trend

in case of Ispat Industries Ltd. In 2006 the Repairs & Maintenance Compared to Fixed assets was 0.72

% and increases to 0.99 % in the next year. Currently it is 1.03%, this indicates that the Repairs and

Maintenance expenses on Plant and Machinery, Office Equipments and Vehicles keeps on increasing

every year as many of the equipment have crossed their useful life and need to be replace to reduce the

repairs and maintenance cost.

8.2.) COMPETITOR ANALYSIS (COMPARISON WITH INDUSTRY

AVERAGES)

Based on the financial results of the year ended 31st March 2009 the following Analysis of the major

competitors in the industry is done. The Financial Results of 2009 are taken into account, as the results

of 31st March 2010 are not yet published in case of some companies. The analysis is done considering

five major competitors of the company namely:

Ø Tata steel

Ø JSW Steel

Ø Essar Steel

Ø Bhushan Steel

Ø Uttam Galva

1.) The Competitor Analysis includes the comparison of Sales and Net Profit After Tax of Ispat

Industries to other competitors in the Industry.

(rs in crores)

COMPARISON OF NPAT AND SALES OF IIL WITH COMPETITORS

Name Of the Company Total Sales Net Profit After Tax

Tata Steel 1,45,686.32 4849.24


Page | 81

Essar Steel 12,703.78 185.20

JSW Steel 17,112.88 274.91

Ispat Steel 9063.44 (- 689.91)

Bhushan Steel 5399.08 424.74

Uttam Galva 4,509.75 100.19

Interpretation

It is observed that the major competitors in the market having sales more than that of Ispat

Industries are gaining profit but in case of Ispat Steel in spite of having sales of

9063.44 cr. records a loss of (- 689.91) cr. Whereas the companies like Bhushan steel And Uttam Galva

having a sales less than ILL still earning profit. This implies that the operating cost in case of ILL,

which includes Depreciation, Maintenance & Repairs expense, is high as compared to other industries.

The analysis of the competitors stated above is as follows:

145686.32

12703.78

17112.88

9063.44

5399.08

4509.75

4849.24

185.2

274.91

-689.91

424.74

100.19

-20000 0 20000 40000 60000 80000 100000 120000 140000 160000

Tata Steel

Essar Steel

JSW Steel

Ispat Ind

Bhushan Steel

Uttam Galva

Net Profit After Tax Sales for the year 2009


Page | 82

2.) NET FIXED ASSET TO NET WORTH RATIO:

Formula:

The Net Fixed Asset to Net Worth ratio of the competitors is stated in the following table:

NET FIXED ASSET TO NET WORTH RATIO

Company Name Net Fixed Asset Net Worth Net fixed Asset to Net

Worth Ratio

Ispat Industries 8897.46 3933.28 2.26:1

Tata Steel 45305.58 27714.28 1.63:1

JSW Steel 18309.16 7803.95 2.3:1

Essar Steel 9128.82 4775.66 1.91:1

Bhushan Steel 5803.10 2202.35 2.63:1

Uttam Galva 1784.52 821.80 2.17:1

INDUSTRY AVERAGE 2.15:1


Page | 83

Interpretation:

Also after doing the industry analysis the major competitors in the iron and steel like Tata Steel,

Jindal Steel, Essar Steel, etc it has been observed that the net fixed asset to net worth ratio for Ispat

Industries is having a ideal net fixed asset to net worth ratio and it matches the industry average which is

2.15:1 Whereas Ispat Industries ratio is 2.26:1.

3.) FIXED ASSET TURNOVER RATIO:

Formula:

The industry analysis in case of the fixed asset turnover ratio is as follows:

Fixed Asset Turnover Ratio (year 2009)

Name Of The Total Sales Revenue Net Average Fixed Fixed Asset Turnover

00.5

11.5

22.5

3

Ispat Industries

Tata Steel JSW steel Essar steel Bhushan Steel

Uttam Galva

2.261.63

2.31.91

2.632.17

Net Fixed Asset to Net worth

Net fixed assets to net worth


Page | 84

company Assets ratio

Ispat Industries 9063.44 9046.91 1:1

Tata Steel 145686.32 43635.93 3.33:1

Essar steel 12703.78 9201.35 1.30:1

JSW steel 17112.88 16670.01 1.02:1

Bhushan Steel 5399.08 5985.14 0.90:1

Uttam Galva 4509.75 1552.12 2.90:1

INDUSTRY AVERAGE 1.74:1

The graphical representation of the data stated in the above table is as follows:

Interpretation:

It has been observed that the higher the ratio better for the company as a high ratio indicates the

business has less money tied up in Fixed Assets for each Rupee of the sales revenue. The Fixed asset

Turnover Ratio in case of IIL is 1:1 in the year 2009, which is not satisfactory when compared to the

industry average of 1.74:1. This implies that the revenue generated from every rupee invested in the

fixed asset for Ispat Industries Ltd is not satisfactory when compared to industry average. It shows that

every Re. Invested in fixed

asset generates 1re sales whereas the company average demands that at least 1.74 rs sales should be

generated from every re. Invested in Fixed assets. A lower ratio as compared to the industry average

1

3.33

1.31.02

0.9

2.9

Industry Analysis of Fixed asset Turnover Ratio

Ispat Ind.

Tata steel

Essar steel

JSW steel

Bhushan steel

Uttam Galva


Page | 85

means that sales are low or the investment in plant and equipment is too much when compared to the

other competitors in the market.

4.) RETURN ON FIXED ASSET (ROFA):

Formula:

The ROFA analysis of the major competitor in the market for the year ended 31st March 2009 is as

follows:

Industry Analysis of ROFA (year 2009)

Name of the

Company

Net Profit Before

Interest And Tax

Net Fixed Average

Assets

ROFA

Ispat Industries 782.47 9046.91 8.64 %

Tata Steel 11008.63 43635.93 25.22 %

Essar steel 1918.39 9201.35 20.84 %

JSW steel 2265.73 16670.01 13.59 %

Bhushan Steel 817.86 5985.14 13.66 %

Uttam Galva 267.01 1552.12 17.20 %

INDUSTRY AVERAGE 16.52 %

The graphical representation of the above tabular data is as follows:


Page | 86

Interpretation:

When the competitor analysis of Return on Fixed Asset is done it is interpreted that the Return

On Fixed Assets in case of the Ispat Industries is 9%, which is very less as compared to the industry

average of 16.52 %. So IIL should take an analysis of its fixed assets as well as the costs, which are

related to these fixed assets, that affects the profits of the company.

9%

25%

20.84%14%

14%

17%

Return On Fixed Asset

Ispat Industries

Tata Steel

JSW Steel

Essar Steel

Bhushan Steel

Uttam Galva


Page | 87

CHAPTER – 9 RESULTS AND FINDINGS

FINDINGS: From the above analysis it was found that the company should go for diposal of some ideal and

unoperational assets. The Disposal of following Assets can be done in IIL.

A.) SPONGE IRON PLANT (BUSINESS AREA 1101):

In SIP Area (1101) the assets that are depreciated to 95% value having total acquisition cost of

653,28,873.21 INR and the current book value of those assets is 34,07,583.07 INR. The assets that have

been depreciated to 99.99% value have acquisition cost of 40650.80 INR and current book value of 3

INR.

On Investigating with the different department regarding the Fixed Assets, which not used in the

operational process or which idle and those Fixed Assets, which are adding to the maintenance cost the

following findings, were listed.

Ø It was found that an Italian Barge Unloader which is not used in the production process till date

from the day it is acquired. The Acquisition cost of this equipment is 16,71,899.07 INR and has a

current book value of 3,57,477.23 INR.

Ø There are 6 grabs lying at the Jetty area, which are not used, in the operational process and each

grab is having an Acquisition cost of 6,45,000.00 INR and the current book value of these grabs

is 4,10,000.00 INR approximately.

Ø There are around 30 nos. of used conveyor belts of different sizes and screens are kept aside in

the Jetty Area.

B) HOT STRIP MILL PLANT (BUSINESS AREA 1102 TO 1104):


Page | 88

In HSM Area (1102 to 1104) the assets that have depreciated to 95% having acquisition value of

247,46,61,149.71 INR and current book value of those assets is 123,66,491.02 INR. The

assets that are depreciated to 99.99% have acquisition value of 1,05,80,730.60 and current book value of

those assets is 283 INR.

On Investigating with the different department regarding the Fixed Assets the following findings, were

listed.

Ø There is a Tilting Machine kept idle in the coil yard and also coil hanging Tong. Both the

Equipments need heavy maintenance to put back again to work. The Acquisition cost of Tilting

Machine is 12,94,892.00 INR and current book value is 10,33,190.78 INR. The Acquisition cost

of coil Hanging Tong is 10,25,000.00 INR and the current book value of the tong is 1,52,045.00

INR.

Ø There are 8 dot matrix printer Model WEP (WIPRO MADE) under the custody of Logistics

Outbound dept. are transferred to the I.T. department as they were not in working condition. The

Acquisition cost of each printer is 81,500.00 INR and the current book value is 22,050.00 INR.

Ø There are 2 Datamax label printers and laser printer are sent to the I.T. dept. for maintenance and

are not in the condition to be repaired. The acquisition cost of Label Printers is 1,45,000.00 INR

and that of laser printer is 24,000.00 INR. Also the current book value of the label printer is

21,574.00 INR and laser printer is 20,400.00 INR respectively.

Ø There are 3 Air conditioners for E.O.T crane, which are not in working condition and cost a lot

on maintenance. The acquisition cost of these AC’s is 43,111.00 INR and the current book value

is 36,797.00 INR.

Ø Under HSM Mill area there are 5 caterpillars of model 973C in the SMS Dept., which are in

critical situation. From these 5 caterpillars three are in the auto repair shop for maintenance from


Page | 89

a longer period, one is lying at the slag area in a broken condition and the remaining one is in

working condition but requires a heavy maintenance. The acquisition cost of those with the auto

repair shop is 1,67,37,982.00 INR and the current book value of the same is 1,09,45,370.00 INR

The one which is at the Slag Pit

Area is having an Acquisition cost of 55,06,299.00 INR. The one, which are in working

condition but requires heavy maintenance frequently is having Acquisition

Ø cost of 53,49,845.00 INR and the current book value of this Equipment, is 2,75,315.00 INR

C) BLAST FURNACE PLANT (BUSINESS AREA 1111 TO 1121):

In BF Area (1111 to 1121) the assets that are depreciated to 95% value having an acquisition value of

31,48,841 INR and Current book value of those assets is 94,942.05 INR. The assets that are depreciated

to 99.99% having acquisition value of 16,79,009.12 and the current book value of those assets are 77

INR.

On Investigating with the different department in Blast furnace Plant regarding the Fixed Assets, the

following findings, were listed.

Ø There is a Barge Loader lying at the Pig Casting Machine, which is under the custody of Blast

Furnace Plant. This Equipment is having an Acquisition cost of 1,56,05,409.52 INR and the

current book value of it is 99,85,971.78 INR.

Ø Asset register of the company was including two assets namely sinter plant and no further details

was given. So a list of the assets was taken from the sinter plant and after doing the

reconciliation if was found that some of the assets were not found in the asset register. So those

assets were segregated and adjusted against the amount of sinter plant. It shows a total amount of

289,86,36,872.67 INR.


Page | 90

CHAPTER - 10 CONCLUSION

Conclusion:

Modern equipment in good repair, is essential for high productivity and efficiency, and hence

for profits. Fixed Assets analysis involves calculating the earnings potential, use, and useful life of Fixed

Assets. Running a successful Manufacturing plant requires a well-developed technology and well-

maintained Equipment. After doing a research on the fixed

assets of Ispat Industries Ltd, I concluded that the company is having a huge amount of Fixed Assets

amounting to Gross total of 13360.63 Cr. The company has invested huge amount in the Fixed Assets,

which are having a potential of high productivity and efficiency. It is really difficult to manage such

huge amount of Fixed Assets but the company management has successfully able to manage these

assets.

It can be also concluded that some of the assets are really obsolete and need a replacement with

new and improved technology. Also the Fixed Asset Register of the company does not provide the

precise information and has some errors, which are to be rectified to manage the fixed assets of the

company in a better way. It was also observed that most of the plant of Ispat Industries Ltd are properly

maintained and are working at its maximum efficiency. There are some equipments which need to be

disposed off or needs a replacement but otherwise the plant is well maintained. It is also concluded that

the employees in the plant are not having information regarding the assets. They don’t have the assets

no. or the acquisition cost or the year of acquisition,etc.


Page | 91

CHAPTER – 11 LIMITATIONS OF THE PROJECT The Limitations that are faced during the prject study are as follows:

Ø Possibility of error in the Fixed Asset information as the Fixed Asset register of the company

does not give a detailed information about the fixed assets for example the quantity purchased,

etc. and also there are spelling errors in the register.

Ø Sample size is limited to 50 employees of the Ispat Industries Dolvi plant, Maharashtra. The

sample size may not adequately sufficient give information of the Fixed Assets of the whole

Company.

Ø As the research contains secondary data so the reliability of the result depends upon the

reliability of the data published.

Ø Management generally not willing to reveal their internal strategies regarding the Fixed Assets to

combat with the competitor. So, the information, which was provided, was basic.

Ø Some respondents were reluctant to divulge information, which can affect the validity of all

responses.


Page | 92

Ø The research is confined to a certain part of Raigad, Dolvi plant. It cannot state the situation of

the whole Ispat Industries Ltd.

Ø Some of the employees do not answer the question due to time constraint.

CHAPTER – 12 SUGGESTIONS AND RECOMMENDATIONS

The suggestions and recommendations that I would like to give to the company management are as

follows:

· The company should give emphasis to Fixed Asset Management, which will focuses on

Acquisition of new Fixed Assets, depreciation on the current Assets, Impairment or Disposal of

Fixed Assets and replacement of the obsolete Fixed Assets.

· The company should think about the depreciation fund method of calculating depreciation.

Where the depreciation for every year is transferred to sinking fund account and then is invested

in the market securities, which can earn a profit.

· Every Fixed Asset should be given an assets number, which is to be written on that particular

fixed asset as it is very difficult to physically locate a particular asset present in the asset register.

· There should be a physical audit of all the fixed assets in order to know, which assets is to be

disposed and which is to be replaced. The Asset disposal / transfer request form should be used

in case of any transfer or disposal.


Page | 93

· The Company complex is spread in over 1200 acres and to travel from one department to other

the company employees uses petrol or diesel driven vehicles, instead of these new technology

battery driven vehicles should be used. This will save the fuel cost as well as maintenance cost.

· Every department should give a report of all the assets with the department to the personnel in

the account department who looks after Fixed Asset Management after every six months. The

reporting from each department should include information of the total assets available, the

assets, which are disposed off, and the assets newly acquired.

· The company has a surplus land available, which should be given to some organization on lease.

This will produce an income for the company.

· Company should have an integrated GIS (geographic information system) to locate fixed assets.


Page | 94

GLOSSARY

INDIAN GAAP.: Indian Generally Accepted Accounting Principles

NESD: No Extra Shift Depreciation

SIP: Sponge Iron Plant

BF: Blast Furnace

HSM: Hot Strip Mill

RDIF Tag: Radio Frequency identification Tag

Scrap: dispose

PP&E: Plant Property and Equipment

FASB: Financial Accounting Standards Board

NPO:Not for Profit Organisation

ICAI: Institute of Chartered Accountants of India

ADR: Asset Disposal Form


Page | 95

REFERENCES

BIBLIOGRAPHY AND WEBLIOGRAPHY

Bibliography:

Books:

1. Prasanna Chandra, “Financial Management”, Ed. 7e 2007, McGraw-Hill Education.

2. C.R.Kothari, ”Research Methodology Methods and Techinques”, Ed. 2008 New Age publication

(Academics).

3. Ispat Industries Ltd., “Annual Report and Financial results”.


Page | 96

4. Meigs, Robert F., and Walter B. Meigs,“Accounting: The Basis for Business Decisions”, Ed.

11th, New York: McGraw-Hill, 1998.

5. Peterson, Raymond H. Accounting for Fixed Assets. New York: Wiley, 1994.

Webliography:

Ø www.ispatind.com

Ø www.indiainbusiness.nic.in

Ø www.indiainfoline.com

Ø www.worldsteel.org

Ø www.icai.org

Ø www.steel.nic.in

Ø www.wikipedia.org


Page | 97

ANNEXURE

Income statements of Ispat Industries Limited:

(Rs. In Crore) Particulars 2010 2009 2008 2007 2006

1.) Sales/Income from Operations 8398.23 9063.44 9401.67 8378.44 5580.02

Less: Excise Duty 615.37 931.46 1117.53 891.87 621.28

a) Net Sales/Income from Operations 7782.86 8131.98 8284.14 7486.57 4958.74

b) Other Operating Income 235.99 405.84 375.75 108.92 51.99

c) Gain on Exchange fluctuation on

operating balances/ Forward Exchange

Contracts 129.69 -

50.71

-

-

Total Sales 8148.54 8537.82 8710.60 7595.49 5010.73

2.) Expenditure

a) Decrease/ (Increase) in stock in

trade and work in progress (99.57) 86.12

158.19

(30.20)

(73.53)

b) Consumption of raw materials 4331.97 4650.84 4535.83 3702.04 2910.12

c) Power & Fuel Cost 1466.93 1289.81 1250.41 1153.52 849.86

d) Purchase of traded goods - - 10.71 - -

e) Employees cost 216.30 207.60 202.60 165.34 131.55

g) Depreciation 624.80 646.62 638.12 623.83 571.43

h) Other expenditure 854.01 872.74 950.27 986.72 861.32

Total Expenditure 7394.44 7753.73 7746.13 6631.45 5250.75

3.) Profit from Operations before

Other Income, Interest &

Exceptional items (1-2)

754.10 784.09 964.47 964.04 (240.02)

4.) Other Income 2.17 0.02 0.40 - -

5.) Profit before Interest &

Exceptional items (3+4)

756.27 784.11 964.87 964.04 (240.02)


Page | 98

6.) a) Interest 1026.36 1061.65 1024.02 990.87 956.83

b) Loss/ (Gain) on Exchange

Fluctuations on Foreign Currency Term

Loans - 97.65

(174.77)

-

-

7.) Profit/(Loss) after Interest but

before Exceptional Items (5-6) (270.09) (375.19)

115.62

3.37

(1196.85)

8.) Exceptional Items

- (648.70)

-

-

-

9.) Profit/(Loss) from Ordinary

Activities before tax (7-8)

(270.09)

(1023.89)

115.62

3.37

(1196.85)

10.) Tax Expenses

- Current Tax 0.02 0.03 0.04 (0.03) (0.03)

- Deferred Tax Charge / (Credit) (17.01) (338.81) 77.04 (9.87) 388.67

- Fringe Benefit Tax - 3.00

3.74

(3.00)

(4.46)

Net Profit/(Loss) (9-10) (253.10) (688.11) 34.80 (9.53) (812.67)

Paid-Up Equity Share Capital

(Face Value of 10/- each) 1221.75 1221.65

1221.58

1218.40

1218.38

Reserves excluding Revaluation

Reserve as per Balance Sheet of

previous Accounting Yr.

-

474.04

501.66

519.08

531.13

Earning Per Share (EPS) (not

annualized)

Basic and Diluted EPS (Rs.) (2.67)

(6.25)

(0.36)

(0.81)

(7.93)

Balance Sheets of Ispat Industries Limited:

(Rs. In Crore)


Page | 99

2010 2009 2008 2007 2006

SOURCES OF FUNDS

Share Capital 2251.01 2324.49 2294.03 2288.74 2288.7

Reserves and surplus 1493.18 (-287.67) 607.58 652.93 (-238.89)

Shareholder's Funds/ Net Worth 3744.19 2036.82 2901.61 2294.167 2049.81

Secured Loans 6871.76 7150.81 6940.05 7849.07 8241.06

Unsecured Loans 71.85 200.24 284.99 466.43 20.03

Total Debts 6943.61 7351.05 7225.04 8315.5 8261.09

Total Liabilities 10687.8 9387.87 10126.65 11257.17 10310.9

APPLICATION OF FUNDS:

Gross Block 13360.63 13557.39 13167.93 13067.37 11455.71

Less: Accumulated Depreciation 5358.23 4669.58 3961.92 3244.04 2554.27

Net Block 8002.4 8887.81 9206.01 9823.33 8901.44

Capital Work in Progress 76.34 98.52 108.25 546.8 398.19

Pre-operative Expenses pending 0 4.19 0 0 217.65

Investments 229.37 232.89 118.04 113.59 113.32

Current Assets, Loans & Advances

Inventories 985.61 1056.19 1368.38 1382.93 1419.36

Sundry Debtors 594.13 645.02 579.83 560.09 728.15

Cash and Bank 128.86 327.65 92.52 78.92 123.1

Loans and Advances 587.65 778.85 834.06 931.42 787.93

Total Current Assets 2296.25 2807.71 2874.79 2953.36 3058.54

Less: Current Liabilities and

Provisions

Current Liabilities 3677.02 3708.97 2693.67 2136.94 2231.83

Provisions 36.47 35 33.34 28.81 12.42


Page | 100

Total Current Liabilities (3713.49) (3743.97) (2727.01) (2165.75) (2244.25)

Net Current Assets -654.95 -785.67 147.78 641.96 52

Miscellaneous Expenses not written

off 0 0 0 0 0

Deferred Tax Assets / Liabilities 967.14 950.13 546.57 623.61 628.3

Total Assets 10687.8 9387.87 10126.65 11257.17 10310.9

Documents

Microsoft Word - Project Report on Financial Savings Through Fixed Asset Management for Ispat Final