Accounting Standard - 10

Property Plant and Equipment

Information about
Help the Users
Prescribe Investment in PPE
of
Objectives of “Accounting
Financial
AS 10 (Revised) Treatment for
Statements to
PPE”
understand Changes in such
Investment

❖ This Standard should be applied in accounting for property, plant and equipment except when
another Accounting Standard requires or permits a different accounting treatment.

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Scope of Standard
This standard does not apply to:
• Biological assets related to agricultural activity other than bearer plants.
• Wasting assets including mineral rights, expenditure on the exploration for and extraction of
minerals, oils, natural gas and similar non-regenerative resources.

Definitions Use in Production

or Supply of
Goods or Services

Condition 1: For rental to

Held for others

PPE For
Administrative
(Tangible Items)
purposes

Condition 2: Used for more

Expected to be than 12 month

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Recognition Criteria
The cost of an item of property, plant and equipment should be recognised as an asset if,
and only if:

• it is probable that future economic benefits associated with the item will flow to the
enterprise and
• Cost of the item can be measured reliably.

Recognition of
Spare parts and stand-by equipment

If the recognition criteria is met If recognition criteria is not satisfied

Accounted as per AS 10 (Revised) Accounted as per AS 2 ‘Valuation for Inventories’

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Measurement at Recognition
An item of property, plant and equipment that qualifies for recognition as an asset should be measured at its cost.
The cost of PPE includes;
Initial Cost: cost incurred initially to acquire or construct the PPE
Subsequent Cost: costs incurred subsequently to add to, replace part of, or service it.

Cost of an Item of PPE

Includes Excludes

Any Directly
Purchase Price Attributable Costs Decommissioning,
Restoration and 1. Cost of opening a new facility or
similar Liabilities business (Such as, Inauguration costs)
1. Costs of employee benefits (AS 15) arising
directly from the construction or acquisition of 2. Costs of introducing a new product or
the item of PPE service (including coasts of advertising
2. Costs of site preparation and promotional activities)
3. Initial delivery and handling costs
3. Costs of conducting business in a new
4. Installation and assembly costs
location or with a new class of
[Link] of testing whether the asset is
customer (including costs of staff
functioning properly, after deducting the
training)
net proceeds from selling any items produced
while bringing the asset to that location and 4. Administration and other general
condition (such as samples produced when overhead costs
testing equipment)
6. Professional fees

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 Self Constructed Assets
• Same principles as for an acquired asset.

• The cost of the asset is usually the same as the cost of constructing an asset for sale.

• Any internal profits are eliminated in arriving at such costs.

• The cost of abnormal amounts of wasted material, labour, or other resources incurred in self-constructing an asset is not included
in the cost

• Any borrowing cost which can be capitalized can be included in the cost of PPE.

• Bearer plants are accounted for in the same way as self-constructed items of PPE before they are in the location and condition
necessary to be capable of operating in the manner intended by management.

Measurement of cost
• If payment is deferred beyond normal credit terms:

Total payment minus Cash price equivalent

o is recognised as an interest expense over the period of credit

o unless such interest is capitalised in accordance with AS 16

• PPE acquired in Exchange for a Non-monetary Asset or Assets or A combination of Monetary and Non-monetary Assets:

Cost of such an item of PPE is measured at fair value unless:

o Exchange transaction lacks commercial substance; Or

o Fair value of neither the asset(s) received nor the asset(s) given up is reliably measurable

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 Measurement after Recognition

Cost Model Revaluation Model

Fair value at the date of the XXX

revaluation
Less: Any subsequent accumulated (XXX)
Cost- Any Accumulated Depreciation- depreciation
Any Accumulated Impairment losses
Less: Any subsequent accumulated (XXX)
impairment losses
Carrying value XXX

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Revaluation
If an item of PPE is revalued the entire class of PPE to which this asset belongs should be
revalued.
Frequency of Revaluations
(Sufficient Regularity)

Items of PPE experience Items of PPE with only

significant and volatile changes insignificant changes in Fair

in Fair value value

Annual revaluation should be Revaluation should be done at

done. an interval of 3 or 5 years

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 Accounting treatment Revaluation
Revaluation

Increase Decrease

Credited Directly to Exception: When it is Charged to the Exception: When it is

owner’s interests under subsequently statement of profit and subsequently
the heading of Increased (Initially loss Decreased (Initially
Revaluation surplus Decreased) Increased)

Recognised in the statement of profit

Decrease should be debited
and loss to the extent that it reverses
directly to owner’s interests
a revaluation decrease of the same
under the heading of Revaluation
asset previously recognised in the
surplus to the extent of any
statement of profit and loss
credit balance existing in the
Revaluation surplus in respect of
that asset

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DEPRECIATION
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Depreciable
amount is the cost of an asset, or other amount substituted for cost, less its residual value.

Component cost approach is to be followed - i.e., Each part of an item of property, plant
and equipment with a cost that is significant in relation to the total cost of the item
should be depreciated separately.

Methods of Depreciation
• The depreciation method used should reflect the pattern in which the future economic
benefits of the asset are expected to be consumed by the enterprise.

Methods of Depreciation

Straight line Method Diminishing Balance Method Units of Production Method

Results in a constant charge Results in a decreasing Results in a charge based on

over the useful life if the charge over the useful life the excepted use or output
residual value of the asset
does not change

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 Review of Residual Value, Useful life & Method of Depreciation
• AS 10 (Revised) required that the residual value, useful life and method of depreciation used
should be reviewed at least at each financial year.
• In case of method of depreciation, if there has been a significant change in the expected pattern of
consumption of the future economic benefits embodied in the asset, the method should be
changed to reflect the changed pattern. Such a change should be accounted for as a change in an
accounting estimate in accordance with AS 5.
• In case of residual value and useful life, , if expectations differ from previous estimates, the
change(s) should be accounted for as a change in an accounting estimate in accordance with AS 5.

Commencement of period for charging Depreciation

Depreciation of an asset begins when it is available for use

Cessesation of Depreciation
1. Depreciation ceases to be charged when asset’s residual value exceeds its carrying amount
2. Depreciation of an asset ceases at the earlier of:
• The date that the asset is retired from active use and is held for disposal,and
• The date that the asset is derecognised

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IMPAIRMENT
An impairment loss is the amount by which the carrying amount of an asset exceeds its
recoverable amount.
To determine whether an item of property, plant and equipment is impaired, an enterprise
applies AS 28, Impairment of Assets.
Compensation from third parties for items of property, plant and equipment that were
impaired, lost or given up should be included in the statement of profit and loss when the
compensation becomes receivable.

RETIREMENTS
• Items of PPE retired from active use and held for disposal should be stated at the lower
of their carrying amount and net realisable value.
• Any write-down in this regard should be recognised immediately in the statement of
profit and loss.

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De-Recognition
The carrying amount of an item of PPE should be derecognised:
• On disposal
* By sale
* By entering into a finance lease, or
* By donation, Or
• When no future economic benefits are expected from its use or disposal

Accounting Treatment:
Gain or loss arising from de-recognition of an item of PPE should be included in the
Statement of Profit and Loss.

Gain or loss arising from de-recognition of an item of PPE

= Net disposal proceeds (if any) - Carrying Amount of the item
Note: Gains should not be classified as revenue, as defined in AS 9 ‘Revenue Recognition’

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 Important Disclosure Requirements
• The financial statements should disclose, for each class of property, plant and equipment:
• The measurement bases (i.e., cost model or revaluation model) used for determining the gross
carrying amount.
• The depreciation methods used.
• The useful lives or the depreciation rates used.
• The gross carrying amount and the accumulated depreciation (aggregated with accumulated
impairment losses) at the beginning and end of the period.

• A reconciliation of the carrying amount at the beginning and end of the period showing:
i. additions;
ii. assets retired from active use and held for disposal;
iii. acquisitions through business combinations ;
iv. increases or decreases resulting from revaluations and from impairment losses recognised or
reversed directly in revaluation surplus in accordance with AS 28;
v. impairment losses recognised in the statement of profit and loss in accordance with AS 28;
vi. impairment losses reversed in the statement of profit and loss in accordance with AS 28;
vii. depreciation;
viii. the net exchange differences arising on the translation of the financial statements of a non-
integral foreign operation in accordance with AS 11, The Effects of Changes in Foreign
Exchange Rates; and
ix. other changes.
Continues…..
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Continues…..
• The financial statements should also disclose:
• the existence and amounts of restrictions on title, and property, plant and equipment pledged
as security for liabilities;
• the amount of expenditure recognised in the carrying amount of an item of property, plant and
equipment in the course of its construction;
• the amount of contractual commitments for the acquisition of property, plant and equipment;
• if it is not disclosed separately on the face of the statement of profit and loss, the amount of
compensation from third parties for items of property, plant and equipment that were
impaired, lost or given up that is included in the statement of profit and loss; and
• the amount of assets retired from active use and held for disposal.

• If items of property, plant and equipment are stated at revalued amounts, the following should
be disclosed:
• the effective date of the revaluation;
• whether an independent valuer was involved;
• the methods and significant assumptions applied in estimating fair values of the items;
• the extent to which fair values of the items were determined directly by reference to
observable prices in an active market or recent market transactions on arm’s length terms or
were estimated using other valuation techniques; and
• the revaluation surplus, indicating the change for the period and any restrictions on the
distribution of the balance to shareholders.

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1. Shrishti Ltd. contracted with a supplier to purchase machinery which is to be installed in its Department A in
three months' time. Special foundations were required for the machinery which were to be prepared within this
supply lead time. The cost of the site preparation and laying foundations were Rs. 1,41,870. These activities were
supervised by a technician during the entire period, who is employed for this purpose of Rs. 45,000 per month. The
technician's services were given by Department B to Department A, which billed the services at Rs. 49,500 per
month after adding 10% profit margin.
The machine was purchased at Rs. 1,58,34,000 inclusive of IGST @ 12% for which input credit is available to Shrishti
Ltd. Rs. 55,770 transportation charges were incurred to bring the machine to the factory site. An Architect was
appointed at a fee of Rs. 30,000 to supervise machinery installation at the factory site.
Ascertain the amount at which the Machinery should be capitalized under AS 10 considering that IGST credit is
availed by the Shristhi Limited. Internally booked profits should be eliminated in arriving at the cost of machine.
(RTP Nov 19)
Solution:
Calculation of Cost of Fixed Asset (i.e. Machinery)
Particulars Rs.
Purchase Price Given (Rs. 158,34,000 x 100/112) 1,41,37,500
Add: Site Preparation Cost Given 1,41,870
Technician’s Salary Specific/Attributable overheads for 3 months (See Note) (45,000 x3) 1,35,000
Initial Delivery Cost Transportation 55,770
Professional Fees for Installation Architect’s Fees 30,000
Total Cost of Asset 1,45,00,140

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2. Preet Ltd. is installing a new plant at its production facility. It has incurred these costs:
1. Cost of the plant (cost per supplier’s invoice plus taxes) Rs. 50,00,000

2. Initial delivery and handling costs Rs. 4,00,000

3. Cost of site preparation Rs. 12,00,000
4. Consultants used for advice on the acquisition of the plant Rs. 14,00,000

5. Interest charges paid to supplier of plant for deferred credit Rs. 4,00,000

6. Estimated dismantling costs to be incurred after 7 years Rs. 6,00,000

7. Operating losses before commercial production Rs. 8,00,000

Please advise Preet Ltd. on the costs that can be capitalised in accordance with AS 10 (Revised). (RTP May 19)
Solution:
According to AS 10 (Revised), these costs can be capitalised:
1. Cost of the plant Rs. 50,00,000
2. Initial delivery and handling costs Rs. 4,00,000
3. Cost of site preparation Rs. 12,00,000
Consultants’ fees Rs.14,00,000
Estimated dismantling costs to be incurred after 7 years Rs. 6,00,000
Rs. 86,00,000

Note: Interest charges paid on “Deferred credit terms” to the supplier of the plant (not a qualifying asset) of Rs.
4,00,000 and operating losses before commercial production amounting to Rs. 8,00,000 are not regarded as directly
attributable costs and thus cannot be capitalised. They should be written off to the Statement of Profit and Loss in
the period they are incurred.

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3. Neon Enterprise operates a major chain of restaurants located in different cities. The company has acquired a new
restaurant located at Chandigarh. The new-restaurant requires significant renovation expenditure. Management
expects that the renovations will last for 3 months during which the restaurant will be closed.
Management has prepared the following budget for this period –
Salaries of the staff engaged in preparation of restaurant before its opening Rs. 7,50,000 Construction and
remodelling cost of restaurant Rs. 30,00,000
Explain the treatment of these expenditures as per the provisions of AS 10 "Property, Plant and Equipment".
Solution: (QP Nov 18)
As per provisions of AS 10, any cost directly attributable to bring the assets to the location and conditions
necessary for it to be capable of operating in the manner indicated by the management are called directly
attributable costs and would be included in the costs of an item of PPE.
Management of Neon Enterprise should capitalize the costs of construction and remodelling the restaurant, because
they are necessary to bring the restaurant to the condition necessary for it to be capable of operating in the manner
intended by management. The restaurant cannot be opened without incurring the construction and remodelling
expenditure amounting Rs. 30,00,000 and thus the expenditure should be considered part of the asset.
However, the cost of salaries of staff engaged in preparation of restaurant Rs. 7,50,000 before its opening are in the
nature of operating expenditure that would be incurred if the restaurant was open and these costs are not necessary
to bring the restaurant to the conditions necessary for it to be capable of operating in the manner intended by
management. Hence, Rs. 7,50,000 should be expensed.
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