Accounting for Fixed Assets: Expert Analysis under AS 10 & Ind AS 16

Executive summary

Accounting for fixed assets represents one of the most significant areas of corporate financial reporting. Fixed assets—often the single largest element of non-current assets on corporate balance sheets—carry long-term economic benefits and are subject to complex judgments about recognition, measurement, depreciation, componentisation, revaluation, impairment and derecognition. This paper provides an expert-level discussion directed at qualified chartered accountants. It examines the core principles embedded in Accounting Standard (AS) 10 – Accounting for Fixed Assets, contrasts them with Ind AS 16 – Property, Plant and Equipment (the Ind AS equivalent converged with IAS 16), and explains practical complexities through corporate case studies, real-life examples and numerical illustrations. The emphasis is on conceptual clarity and practical application within an Indian corporate context.

1. Fundamental accounting concepts underlying fixed asset accounting

Several fundamental accounting concepts underpin accounting for fixed assets. An understanding of these concepts is essential prior to applying AS 10 or Ind AS 16.

Historical cost principle

Under AS 10, the starting point for recognition is the historical cost principle—assets are initially measured at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire the asset at the time of acquisition. Historical cost provides reliable, verifiable measurement but may not reflect current economic value.

Matching principle

The matching principle requires that the cost of an asset be systematically allocated to periods that benefit from the asset’s use (depreciation). Correct application ensures profit measurement aligns revenues and the consumption of economic benefits.

Prudence (conservatism)

Prudence plays a role in impairment recognition and conservative measurement where uncertainty exists. While Ind AS frameworks emphasize fair presentation and neutrality, prudence remains a guiding notion when making estimates under uncertainty.

Substance over form

Accounting must reflect the economic substance rather than legal form. For fixed assets, this can affect classification (e.g., finance lease assets under Ind AS 17/IFRS 16) and control assessments for consolidation.

Reliability versus relevance

Historical cost is reliable but may lack relevance under inflation or technological change. Ind AS 16 allows periodic revaluations to fair value, trading off some reliability for increased relevance when fair value can be measured reliably.

2. Overview of AS 10 and its evolution

AS 10 prescribes recognition, measurement, depreciation and disclosure requirements for fixed assets. Historically the standard emphasized cost basis and did not require component accounting or allow revaluation in the same manner as Ind AS 16. AS 10 remains applicable for companies that have not adopted Ind ASs; many Indian companies listed on stock exchanges or subsidiaries of multinational firms have transitioned to Ind AS reporting, while several entities still follow AS 10 under the pre-Ind AS regime.

Key features of AS 10 include:

– Recognition criterion: an item is recognized when it is probable that future economic benefits will flow to the enterprise and the cost can be measured reliably.

– Initial measurement: at cost, including directly attributable costs of bringing the asset to working condition for its intended use.

– Subsequent measurement: primarily cost model; AS 10 permits revaluation in rare circumstances but lacks the detailed measurement approach present in Ind AS 16.

– Depreciation: systematic allocation over useful life; AS 10 provides guidance on methods and revising estimates.

– Disclosure: nature and carrying amount of each class of property, plant and equipment, depreciation methods, and change in estimates.

3. Ind AS 16 – Convergence with IAS 16

Ind AS 16 aligns closely with IAS 16. It retains the recognition at cost criterion but explicitly permits the cost model and the revaluation model as subsequent measurement bases. Ind AS 16 introduces or emphasises several features absent or weakly articulated in AS 10, notably component accounting, revaluation to fair value, and clearer interface with impairment testing under Ind AS 36.

Key distinctions include:

– Revaluation model: Ind AS 16 allows assets to be carried at a revalued amount (fair value at revaluation date less subsequent depreciation), provided fair value can be measured reliably.

– Component accounting: each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost must be depreciated separately.

– Borrowing costs: Ind AS 23 and Ind AS 16 interaction for capitalisation of borrowing costs for qualifying assets is clearer.

– Disclosure requirements: far more extensive in Ind AS 16, including carrying amounts by class, revaluation details, and movement schedules.

4. Recognition and initial measurement

Recognition criteria

Both AS 10 and Ind AS 16 apply the probability and reliable measurement tests for recognition. The practical challenge lies in allocating costs between assets and expenses—e.g., whether an expenditure is a capital improvement (recognized as part of the asset) or a revenue expense. Judgement areas include major overhauls, pre-production costs, and installation and commissioning expenses.

Cost components

Typical components of cost include purchase price, import duties, non-refundable taxes, directly attributable costs (site preparation, delivery, installation), and the initial estimate of dismantling or restoration costs (an obligation recognised under Ind AS 37; the present value of future obligations is included in cost and capitalised). Cost does not include proceeds from selling items produced while bringing the asset to working condition.

Illustration: Initial recognition

Company A purchases a manufacturing machine for INR 10,000,000. Additional costs incurred: freight INR 200,000, installation INR 300,000, testing consumables INR 50,000. The total cost capitalised under AS 10/Ind AS 16 is INR 10,550,000 (assuming testing consumables are part of bringing the asset to working condition).

5. Subsequent measurement – cost model versus revaluation model

Cost model

Under the cost model (both frameworks permit it), an asset is carried at cost less accumulated depreciation and accumulated impairment losses. This model is straightforward and simple to apply, provides high reliability but may understate economic value over time.

Revaluation model (Ind AS 16)

Ind AS 16 allows revaluation to fair value provided fair value can be measured reliably. Revaluations must be done with sufficient regularity so that carrying amount does not differ materially from fair value. Revaluation increases are credited to other comprehensive income and accumulated in equity under the heading of revaluation surplus, unless they reverse a previous revaluation decrease charged to profit or loss. Revaluation decreases are charged to profit or loss unless they offset a previous revaluation surplus.

Numerical example: revaluation entry

Company B holds land at historical cost INR 5,000,000. At revaluation date fair value is INR 8,000,000. Revaluation increase INR 3,000,000 is recognized in other comprehensive income and in equity as revaluation surplus. Subsequent depreciation for depreciable assets reduces the revaluation surplus to the extent of depreciation attributable to the revaluation increase.

Practical considerations

Frequent revaluations increase cost and require valuation expertise. In India, property values can be volatile; management must justify revaluation frequency and valuation methods. Also, revaluation introduces complexity for tax, dividend and debt covenant computations when carrying amounts differ across accounting and tax bases.

6. Component accounting – a paradigm shift under Ind AS

Component accounting requires identification of significant parts of an item of property, plant and equipment with differing useful lives or patterns of consumption and depreciating them separately. This leads to more accurate expense recognition and useful life assessment.

Illustration: Passenger aircraft

Consider an airline that purchases an aircraft. Major components include airframe, engines, landing gear, and interior refurbishments. Engines may have a different useful life and replacement cycle compared to the airframe. Componentisation requires separate recognition and depreciation for engines if material. When an engine is replaced, the remaining carrying amount of the replaced component is derecognised and the new component recognised.

Numerical example: component accounting

Company C buys an asset for INR 100,000,000 where the engine cost INR 20,000,000 and airframe INR 80,000,000. If the engine is to be replaced every 7 years and the airframe depreciated over 28 years, depreciation charge year 1:

– Engine: 20,000,000 / 7 = INR 2,857,143

– Airframe: 80,000,000 / 28 = INR 2,857,143

Total annual depreciation = INR 5,714,286. Component accounting yields more accurate periodic charges compared to a single-life approach.

7. Depreciation accounting and useful life considerations

Depreciation methods and useful life

Depreciation reflects the systematic allocation of an asset’s depreciable amount over its useful life. Common methods include straight-line (SLM), diminishing balance, and units-of-production. Selection should reflect the pattern in which the asset’s future economic benefits are expected to be consumed.

Revising useful lives and residual values

Estimates of useful life and residual value should be reviewed at each reporting date. Changes are accounted for prospectively as a change in accounting estimate under Ind AS/AS frameworks. Frequent revisions indicate either poor initial estimation or changing asset utilisation and must be disclosed with rationale and effect on profit.

Example: change in useful life

Company D uses SLM for plant having initial useful life 10 years. After 3 years, due to technology changes life reduces to 7 years. Carrying amount after 3 years = cost less 3 years depreciation. The revised remaining depreciable amount is spread over new remaining life (4 years), increasing annual depreciation prospectively.

Tax versus accounting depreciation

Tax depreciation rates differ from accounting depreciation. Companies must maintain separate records for tax and accounting, and the difference gives rise to deferred tax accounting under Ind AS 12. Effective communication between finance and tax departments becomes crucial when asset policies change.

8. Impairment of assets – linkage with Ind AS 36

Impairment indicators

Assets must be reviewed for impairment indicators under Ind AS 36. Indicators include significant adverse changes in market, obsolescence, physical damage, or worse-than-expected economic performance. Ind AS 36 establishes a recoverable amount test (higher of fair value less costs of disposal and value in use) and requires recognition of impairment losses measured as the difference between carrying amount and recoverable amount.

Illustration: impairment in a manufacturing plant

Company E operates a niche manufacturing plant whose market demand falls sharply. If the recoverable amount is determined to be INR 40,000,000 and carrying amount INR 60,000,000, an impairment loss INR 20,000,000 is recognised in profit or loss and reduces the asset’s carrying amount.

Reversals of impairment

Under Ind AS 36, reversals of impairment losses for assets other than goodwill are permitted if recoverable amount increases. Reversal is limited to the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognised. Under AS 10, impairment guidance is less prescriptive and may be embedded across standards and guidance notes.

9. Derecognition and disposal of fixed assets

Derecognition occurs when an asset is disposed of or when no future economic benefits are expected from its use or disposal. The gain or loss on disposal equals the difference between net disposal proceeds and carrying amount.

Numerical illustration: disposal

Company F sells equipment with carrying amount INR 3,000,000 for proceeds INR 3,500,000. Gain on sale is INR 500,000 which is recognised in profit or loss. If costs of disposal exist, these are deducted from proceeds to compute net gain.

Special issue: exchange of assets and non-monetary transactions

Non-monetary exchanges involve judgements about fair values. Ind AS 16 requires that the exchange has commercial substance and fair values can be reliably measured for the transaction to be measured at fair value; otherwise, it is measured at carrying amount.

10. Corporate case studies – practical application and complexities

Case study 1: ManufacturingCo – Component accounting and overhauls (Hypothetical but typical)

Manufacturing Co operates a paper mill. The enterprise had historically capitalised major overhauls as part of the asset but treated them inconsistently between entities. On adopting Ind AS, management performed component analysis and identified the paper machine’s dryer section and the pulping equipment as components with significantly different useful lives and overhaul cycles. Overhaul costs were capitalised to the relevant component when the recognition criteria were met, and corresponding depreciation policies were established. The result was a more granular depreciation charge and clearer forecasting for capital expenditure. The key learning: identification and consistent application of component accounting enhances asset management decisions and yields more comparable financial statements across periods.

Case study 2: InfraCo – Revaluation of land and infrastructure assets (Hypothetical)

InfraCo holds large tracts of land and infrastructure in an urban redevelopment project. On transition to Ind AS, management opted for selective revaluation of land to reflect current fair value. Professional valuation was obtained, and the revaluation surplus was recognised in other comprehensive income. Debt covenant calculations were renegotiated with lenders who accepted Ind AS carrying amounts for covenant testing. Practical issues encountered included public disclosure of valuation techniques and reconciling tax bases which continued at historical cost. The learning: revaluation improves relevance but introduces volatility and additional disclosure requirements.

Case study 3: PowerCo – Impairment following regulatory change (Hypothetical)

A change in the regulatory tariff regime reduced projected cash flows for certain generation units. PowerCo tested units for impairment under Ind AS 36 and recognised impairment losses for affected units. The impairment assessment required robust cash flow forecasting, discount rate estimation, and scenario analysis. The complexity lay in determining the appropriate cash-generating unit, estimating future tariffs and fuel costs, and documenting management assumptions to satisfy auditors.

11. Real-life examples and industry specific complexities

Construction and infrastructure

Long gestation and modular project delivery complicate initial recognition and subsequent measurement. Distinguishing between capital work-in-progress and inventory (in case of developer sales) requires careful judgement. Capitalisation of borrowing costs, allocation of common overheads and treatment of land held for development require clear policies.

Aviation

Aircraft involve significant component accounting (engines, avionics, interiors). Lease accounting interaction (leases of aircraft and engines), maintenance reserves, and cycles-based depreciation are industry-specific features.

Information technology and software

Hardware has finite useful lives and rapid obsolescence; capitalisation of software development costs requires rigorous criteria to separate research from development phases. Cloud-based service models raise classification and control questions.

Hospitality and real estate

Hotel assets often undergo periodic refurbishment (e.g., furniture, fixtures, and fittings). Determining whether refurbishments should be capitalised or expensed depends on whether they enhance economic benefits or simply restore the asset to original standard. For real estate, investment property accounting under Ind AS 40 may apply when properties are held to earn rentals or for capital appreciation.

12. Illustrations and numerical analysis – worked examples

Example 1: Component replacement and derecognition (numerical)

Company G purchases a machine for INR 10,000,000 comprising two major components: main unit INR 7,000,000 (useful life 20 years) and a specialised tool assembly INR 3,000,000 (useful life 5 years). After 5 years, the tool assembly is replaced at a cost of INR 2,500,000. Carrying amounts at replacement date:

– Tool assembly carrying amount after 5 years = 3,000,000 – (3,000,000/5 * 5) = 0 (fully depreciated)

– Main unit carrying amount after 5 years = 7,000,000 – (7,000,000/20 * 5) = 7,000,000 – 1,750,000 = 5,250,000

Journal entry on replacement:

– Recognise new tool assembly at cost INR 2,500,000 (capitalise)

– No derecognition needed for replaced tool if carrying amount is zero; if carrying amount existed, derecognise and recognise gain or loss.

Example 2: Revaluation and depreciation transfer

Company H holds a building at cost INR 20,000,000 with accumulated depreciation INR 6,000,000 (carrying amount INR 14,000,000). Fair value at revaluation date is INR 26,000,000 (increase INR 12,000,000). Accounting entries:

– Increase recognised: INR 12,000,000 credited to OCI as revaluation surplus.

If subsequent depreciation for year is INR 400,000 (based on revalued amount), transfer from revaluation surplus to retained earnings may be done corresponding to depreciation related to revaluation increase, if policy permits, as per Ind AS 16 presentation requirements.

Example 3: Impairment measurement (value in use)

Company I has a cash-generating unit with estimated future cash flows (undiscounted):

Year 1: INR 10,000,000

Year 2: INR 12,000,000

Year 3: INR 14,000,000

Terminal growth thereafter at 3%

Appropriate discount rate: 10%

Compute discounted cash flows and compare with carrying amount to assess impairment (detailed calculations omitted here for brevity but require discounted PV computation emphasising sensitivity to discount rate and growth assumptions).

13. Comparative study between AS 10 and Ind AS 16

Similarities

– Core recognition principles and initial measurement at cost remain common.

– Depreciation concept and requirement for systematic allocation applies in both frameworks.

– Requirement to review useful lives and residual values periodically exists in both.

Differences

– Revaluation model and component accounting are explicit and central under Ind AS 16 but are less developed in AS 10.

– Disclosures under Ind AS 16 are more comprehensive and require movement schedules, revaluation details, and reconciliation of carrying amounts.

– Impairment testing interaction is more prescriptive under Ind AS and aligns with Ind AS 36.

14. Practical challenges and audit considerations

Valuation expertise and documentation

Revaluations and impairment tests require valuation experts. Management must document methodologies, assumptions, and sensitivity analyses. Auditors will evaluate the competence, objectivity and independence of valuation experts and may perform their own procedures to corroborate a assumptions.

Internal controls and asset registers

Robust fixed asset registers capturing cost, location, depreciation policy, component details, and disposal history are necessary. Controls over additions, transfers, retirements and physical verification minimise misstatements and fraud risk.

Tax and regulatory interactions

Tax depreciation, claiming of investment allowances, and transfer pricing implications require careful coordination between accounting and tax teams. Ind AS transition adjustments can affect covenants, dividend policy and distributable profits calculations, necessitating stakeholder communication.

Disclosure and stakeholder communication

Revaluation surpluses, impairment losses and changes in useful lives affect reported profitability and ratios. Transparent notes and reconciliations help users understand impacts and maintain trust with stakeholders including lenders, investors and regulators.

15. Conclusion – the road ahead in fixed asset accounting

Accounting for fixed assets requires a synthesis of accounting judgment, valuation skill, and robust disclosure. Ind AS 16 enhances the relevance and comparability of reporting through componentisation, revaluation flexibility and rigorous disclosures, but also increases complexity. For practising chartered accountants, embracing these features implies strengthening interdisciplinary capabilities—valuation, tax, engineering and audit—and enhancing internal asset governance. The ultimate goal is faithful representation: assets should be recognised, measured and disclosed in a manner that faithfully represents the economic realities of the enterprise while providing decision-useful information to stakeholders.

Appendix – Practical checklist for auditors and preparers

1. Asset recognition: confirm capitalisation policy and ensure costs meet recognition criteria.

2. Component accounting: perform materiality analysis on componentisation; document component lives.

3. Revaluation policy: if adopted, ensure periodic independent valuations, document valuation model and inputs.

4. Depreciation: review methods, residual values and useful lives annually; document changes as estimates.

5. Impairment: identify indicators and perform testing at CGU level; retain assumptions and sensitivity analyses.

6. Derecognition: ensure disposals are properly authorised and gains/losses accurately measured.

7. Disclosures: prepare movement schedules, revaluation reconciliations and policy disclosures as per Ind AS 16/AS 10.

8. Tax coordination: reconcile accounting and tax depreciation and assess deferred tax impact.

9. Internal controls: verify asset tagging, physical verification schedules, and asset registry completeness.

10. Audit readiness: maintain working papers, valuations, board approvals and minutes supporting judgments.

References and further reading

– Accounting Standard 10 – Accounting for Fixed Assets (Institute of Chartered Accountants of India)

– Ind AS 16 – Property, Plant and Equipment

– Ind AS 36 – Impairment of Assets

– Ind AS 23 – Borrowing Costs

– Selected technical guidance notes, valuation standards, and industry practice guides for asset valuation and component accounting.