In the preceding chapter, we examined the liability side of the balance sheet in depth. Now, let us look into the Assets that compose the other half of it. The Asset side reveals all the resources owned by a company since its foundation. Assets are basically what helps to produce revenues. Here is a glimpse into the Assets section:
As it can be observed, the Asset side includes two main segments: Non-current assets and Current assets. They incorporate several line items (with related comments) that will be closely examined.
– – Non-current assets (Fixed Assets)
As we learnt in the previous chapter, non-current assets refer to a company’s assets which will provide economic benefit for more than 365 days.
If you take a look at the non-current assets, you’ll find “Fixed Assets” as one of its subsections, with several line items attached. Fixed assets are long-term possessions of the firm, whether physical or intangible; land, plant and machinery, vehicles and structures are tangible examples, while intangible ones remain valid for an extended period of time.
All entries beneath Fixed Assets have an identical footnote labelled 10 – let us take a more detailed look at this shortly.
This is a look at the fixed assets of Amara Raja Batteries Limited:
The first line item ‘Tangible Assets’ is valued at Rs.619.8Crs and consists of assets which have a physical form; for example, plant and machinery, vehicles, buildings, fixtures etc., that can be seen or touched.
As we move forward to the following line, the value of intangible assets is Rs. 3.2 Crs including patents, copyrights, trademarks, and designs – all of which have economic value but do not possess a physical nature.
When we talked about the P&L statement, we explored depreciation – a method for allocating the cost of obtaining an asset over its useful life. This is because assets often have reduced productivity due to age and deterioration, known as Depreciation expense. It’s included on both the Profit and Loss Account and Balance Sheet.
When a company procures an asset, it is regarded as the Gross Block, and depreciation needs to be deducted from that amount so that we can reach the Net Block. This should be done over the course of its useful life.
Gross Block –Accumulated Depreciation= Net Block
The word ‘Accumulated’ is used to indicate the entire amount of depreciation that has taken place over its lifespan.
When we examine the Net Block at Rs.619.8 Crs, with Intangible assets factored in at Rs. 3.2 Crs. This represents the company’s assets minus any accumulative depreciation. For further information, take a look at Note 10, which deals with fixed asset details.
At the top of the note, you can see a Gross Block as well as Depreciation/Amortisation. The Net block has been highlighted, and two numbers correspond with what was stated in the balance sheet.
Let’s observe other fascinating elements of this note. Pay attention to the Tangible Assets section, which provides a list of all the properties owned by the firm.
The company has included ‘Buildings’ among its assets that are tangible. I have highlighted this part.
ARBL reported the building’s value at Rs.93.4 Crs, and during FY14 they acquired Rs.85.8 Crs worth of building, which has been categorised as ‘additions during the year’. Additionally, there was also a decrease of 0.668 Crs in terms of its value, described as ‘deductions during the year’, meaning that the current year value of the building would be:
The value of the building from the previous year, added with any additions made during the current year and deducted amounts, yields the updated value.
93.4 + 85.8 – 0.668
This number is in blue in the image above. The figure to consider is the gross block of the building, less accumulated depreciation, which I have indicated in the snapshot below. This will give the ‘Net Block’.
By 31st March 2013, ARBL had depreciated Rs.17.2 Crs; a further Rs.2.8 Crs must be added for FY14, deducting 0.376 Crs for the same year. The overall depreciation for this period is then:
Previous year’s depreciation value + Current year’s depreciation – deduction for the year
= 17.2 + 2.8 – 0.376
Total Depreciation= Rs.19.736 Crs. This is highlighted in red in the image above.
We have to build a gross block of Rs. 178.6 Crs and incorporate depreciation of Rs. 19.73 Crs, resulting in a netblock of Rs. 158.8 Crs (178.6 – 19.73). This can be seen in the image below:
Carrying out the same procedure, all tangible and intangible assets are assessed to calculate the Total Net block figure.
The fixed assets category includes two specific entries: Capital work in progress (CWIP) and Intangible assets under development.
CWIP is correctly termed ‘Capital Work in Progress’, and is included in the Net block on a balance sheet. It is a work that has had capital expenditure incurred, yet it remains incomplete. ARBL in particular has Rs.144.3 Crs under CWIP – this could refer to buildings, machinery and other assets that are still undergoing construction. Upon completion, the asset will then be moved into the tangible assets (fixed assets) category.
The conclusion of the fixed cost calculation is ‘Intangible assets under development’. This work may include patent or copyright filing, or brand creation and represents a minuscule 0.3 Crs cost for ARBL. All these amounts make up the total calculated fixed expenditure of the firm.