Fixed assets demolished
A company (say Company X) is engaged in development, operation and maintenance of a hospital. The company wants to increase the number of beds in the hospital which requires demolition of certain part of the hospital. The demolition shall be that of building structure, furniture and fittings and other assets. The demolition needs to be done so that the existing building can be extended to handle more patients. The book value of the assets to be demolished is significant and it is expected that on disposal, demolished assets may not yield any significant amount.
The company wants to know whether it can capitalize the book value of the demolished assets with capital expenditure incurred on expansion on the basis of Paragraph 21 of AS 10. As per the said para, “the cost of a self-constructed fixed asset should comprise those costs that relate directly to the specific asset and those that are attributable to the construction activity in general and can be allocated to the specific asset”.
As per Para 25 of AS 10, “Fixed asset should be eliminated from the financial statement on disposal or when no further benefit is expected from its use and disposal”.
As per Para 26 of AS 10, “Losses arising from the retirement or gains or losses arising from the disposal of fixed asset which is carried at cost should be recognised in the profit and loss statement”.
Referring above provisions, in the instant case, the company should remove fixed assets so demolished from the books and any profit or loss arising on such disposal should be recognised in the statement of profit and loss. The company cannot capitalize the book value of the demolished assets in the present case.