Overview of Accounting Standard (AS) 10: Property, Plant and Equipment

Summary: Accounting Standard (AS) 10 deals with the accounting for Property, Plant, and Equipment (PPE), providing guidelines on when and how to record these assets. PPE refers to tangible assets used for production, services, or administrative purposes with an expected life of more than 12 months. The cost of PPE should include the purchase price, directly attributable costs (e.g., transportation, installation), and liabilities like restoration costs, but exclude refundable taxes or administrative overheads. Spare parts and major replacements meeting recognition criteria are treated as PPE, while repair costs are expensed. Revaluation of PPE should be performed for an entire asset class and is necessary when fair value fluctuates significantly. The revaluation affects both the asset’s value and shareholders’ equity. PPE is typically measured using either the cost model or revaluation model, with depreciation calculated systematically over its useful life. Depreciation should be reviewed annually, and assets like land are not depreciated. Depreciation methods include the Straight Line Method (SLM), Written Down Value (WDV), and Production Unit method, and depreciation stops when the residual value exceeds the carrying amount. Additionally, transactions involving the exchange of assets are measured at fair value unless there is no commercial substance, in which case the book value of the exchanged asset is used. AS 10 does not apply to biological or wasting assets and provides specific guidance for leased or government-funded property.

Objective of Accounting Standard (AS) 10

This Standard should be applied in accounting for property, plant, and equipment except when another Accounting Standard requires or permits a different accounting treatment. – E.g. AS- 26 – Intangible Assets.

Accounting means –

• What to record
• When to record
• How to record

Meaning of PPE –

Condition 1 –

Held for use in –

• Production or supply of goods or services
• Rent
• Administrative purposes (wider sense – selling, a/cing, finance, etc)

Condition 2 –

• Expected use for more than 12 months

Recognition Criteria – When to recognize? 

The COST of PPE should be recognized as an asset, only if –

• Future economic benefits associated with the item will probably flow to the enterprise.
• The cost of the item can be measured reliably.

AS not applicable to –

• Biological assets – e.g. – living animals, plants
• Wasting assets – e.g. – iron ore, mineral ore
• The cost of an item of property, plant, and equipment held by a lessee under a finance lease is determined under AS 19, Leases.
• The carrying amount of an item of property, plant and equipment may be reduced by government grants in accordance with AS 12, Accounting for Government Grants.

Exception – Bearing Plants – AS-10 is applicable

• Used in the production or supply of agricultural products
• Expected produce for more than 12 months
• Has a remote chance of being sold as agricultural produce
• g. – Mango tree, litchi tree, crops, trees grown as lumber (log)

COST –

An item of PPE that qualifies for recognition as an asset shall and always be recognized at its COST.

Cost –

• Purchase price (incl. import duties & non-refundable purchase taxes)
• Directly attributable cost – Costs directly associated with bringing the asset to the location or condition necessary for it to be used as intended by the management. Such as transportation and installation. (e.g. – installation cost, site prep exp, erection charges, professional fee, carriage, etc)
• Restoration & other related liabilities (e.g. – a machine mortgaged with the bank and the bank will charge INR 20K to settle a liability)
• Where several items of property, plant, and equipment are purchased for a consolidated price, the consideration is apportioned to the various items based on their respective fair values at the date of acquisition. In case the fair values of the items acquired cannot be measured reliably, these values are estimated on a fair basis as determined by competent valuers.

Cost to exclude –

• Refundable taxes or duties
• Inauguration cost – cost paid to celebrity to inaugurate machine
• Advertisement cost – an amount paid to a celebrity for an advertisement
• Business development cost
• Administrative o/h cost etc.

Treatment of Spare Parts –

• If it meets the recognition criteria of PPE (future economic benefit, life >12 months) – to be included in PPE
• If it does not meet the recognition criteria of PPE – to be treated as inventory AS-2 (e.g. – life will not have 12 months)

Treatment of Replacement of Parts (known as inspection) –

• When a major replacement (inspection) is performed, its cost is recognized in the carrying amount (book value / WDV) of the item of PPE as a replacement (if recognition criteria are satisfied).
• Any remaining carrying amount of the cost of the previous inspection is derecognized.
• g. – a machine has a Carrying Value (CV) of INR 1,00,000, a part of the machine whose CV is INR 2,000 is to be replaced by a cost of parts of INR 5K – Carrying amount = 1,00,000 + 5,000 – 2,000 = 1,03,000

Treatment of Subsequent Cost (repair & maintenance) –

• Means – one kind of recurring cost
• Repair cost – charge to P/L account

Revaluation of PPE –

Increase –

PPE (↑)

Revaluation Reserve (shareholders’ fund ↑)

Decrease –

PPE (↓)

Revaluation Reserve Debit in PL

Subsequent Decrease –

PPE (↓)

Adjust with Rev Reserve & then balance if any, charge to PL

Subsequent Increase –

PPE (↑)

Firstly, Cr in PL, then balance if any, increase Revaluation Reserve

Revaluation of an entire class of PPE –

• If an item of PPE is revalued, the entire class of PPE to which that asset belongs should be revalued. I.e., one single asset from a class of assets cannot be revalued.

Frequency of revaluation –

• Volatile changes in FV – means value goes up, down, up, down – then annually it needs to be done
• Insignificant changes in FV – 3 or 5 years. Reference – Para 37.

Subsequent Measurement of PPE –

PPE should be carried at –

 Cost Model –

Cost                                                  xxx

(-)          Accumulated Depreciation  xxx

(-)          Accumulated impairment loss          xxx

Revaluation Model –

*** Initial measurement @ cost.

Exchange of Assets (Monetary & Non-Monetary) –

• Exchanged Assets are measured @ FAIR VALUE.
• Exception – exchange transaction lacks commercial substance – in this case, the value will be taken as the Book Value of assets given.
• Commercial substance means the intention of the transaction.
• Commercial Substance is there – M1 has a book value of INR 10,00,000. Exchanged with Cash Monetary value of INR 20,00,000 and M2 book value @ INR 25,00,000 = Value of assets received (M2) = Fair Value = 25,00,000. (total FV 45 lacs – cash received 20 lacs)
• No Commercial Substance – means any factor that is influencing the transaction – like a related party.
• A car whose BV is INR 13,00,000, Fair value is INR 13,25,000, exchanged with related party @ cash of INR 15,000, and a car whose FV is 13,10,000. = Value of car received = Book Value of assets given = 13,00,000.

DEPRECIATION

• Amount to be allocated on a systematic basis over the useful life.
• A Part of PPE with significant cost → Should be depreciated separately.
• A Part of PPE with a significant cost – May have a useful life & depreciation method the same as another significant part – Such parts may be grouped together to determine the depreciation charged.
• Depreciable amount = Cost (-) Residual Value. I.e. amount that should be allocated over the useful life in systematic manner.
• Commencement of charging depreciation should be from the date of asset “READY TO USE” / AVAILABLE FOR USE. Reference Para 57.
• Depreciation ceases to be charged when Residual Value (scrap value/ salvage value/ estimated value of an FA @ end of its useful life) > Carrying Amount.
• Land is not depreciated (because its useful life is unlimited). Reference Para 60 & 61.
• Depreciation Methods – SLM, WDV / diminishing value method, Production Unit method.
• The depreciation method/policy applied should be reviewed at least at the end of FY. In case of a change in estimates, account for it as per AS-5.

Exception – when depreciation is not an expense –

• Depreciation of mfg plant & equipment (specific machine to use in production) is included in the cost of inventory (AS-2).
• Depreciation of PPE used for development activities may be included in the cost of intangible assets (AS-26).