AS 10 – Accounting Standard on Property, Plant and Equipment

AS 10 (Revised) – Property, Plant, and Equipment is a standard issued by the Institute of Chartered Accountants of India (ICAI). It gives directions on the recognition, measurement, depreciation, revaluation, and disclosure of tangible fixed assets used in business operations. This standard applies to items used over a period longer than an accounting period and held for the production or supply of goods and services, leasing to others, or management. It provides consistency in accounting for assets, such as land, buildings, machinery, and equipment, by explaining cost determination, follow-up expenditures, component accounting, and disclosure requirements.

What is Property, Plant And Equipment Under AS 10?

AS 10 (Revised) defines Property, Plant, and Equipment (PPE) as physical assets that are:

1. held for use in the manufacture or supply of goods or services, for leasing to other parties, or for administrative purposes; and
2. expected to be used over a period of several accounting periods. The assets are not intended to be resold in the ordinary course of business, but rather are designed to provide long-term economic benefits.

Examples of PPE are land, buildings, machinery, plants, furniture, vehicles, and equipment. PPE is recognised where future economic benefits are expected and the related cost can be accurately measured.

Cost of Plant, Property And Equipment (PPE) Under AS 10

The cost determination is crucial since it serves as the basis for future depreciation, impairment, and disposal accounting. AS 10 (Revised) prescribes the cost of PPE to include the purchase price, directly attributable costs, borrowing costs (where appropriate), and estimated dismantling/restoration costs. It excludes administrative, anomalous, and irrelevant costs by clear implication.

A. Components of Cost of PPE

The cost of PPE covers all expenses directly linked with putting the asset into readiness for its purpose and place. By and large, it covers:

1. Purchase Price: The original purchase cost of the asset, including import duties, irrecoverable taxes, and trade discounts or rebates.

2. Directly attributable costs

• Expenses incurred to put the asset into operating condition, including the cost of site preparation.
• Upfront delivery and handling charges.
• Installation and assembly costs.
• Engineer and architect professional fees.
• Testing charges (minus any proceeds from test sale items, e.g., trial run products).

3. Borrowing Costs: If the asset is a “qualifying asset” (i.e., it takes considerable time to become ready for use), then directly attributable borrowing costs incurred in acquiring or constructing it are capitalised as per AS 16 – Borrowing Costs.

4. Dismantling and Restoration Costs: The initial calculation of expenses required to dismantle, take away, and rebuild the site, subject to the enterprise possessing a present duty to pay such expenses as a consequence of purchasing or using the asset.

B. Exclusions from Cost

The items listed below are not included in the PPE cost and have to be recognised as expenses at the time they arise.

• General overhead expenses and administrative costs that are not directly allocable.
• Excessive costs (e.g., wastage during construction or overuse of labour/material).
• Start-up operating losses incurred before the anticipated performance levels are reached.
• Costs of business relocation or restructuring of operations.

C. Self-constructed Assets

• The costs attributed to PPE built internally consist of materials, labor, overheads that can be attributed, and cost of allocation of fixed overheads.
• The method eliminates profits made internally.
• It avoids wastage of excessive resources.

D. Asset Exchange

• When PPE is acquired in exchange for another asset, the cost is valued at the fair value of the asset given up or the fair value of the asset acquired, whichever is more apparent.
• If the exchange lacks commercial substance or if fair value cannot be measured reliably, the asset is recognised at the carrying amount of the asset relinquished.

E. Subsequent Expenditure

• Only costs incurred subsequent to initial identification are capitalised if they increase future economic benefits, e.g., major repairs, enlargements, or improvements.
• Maintenance and service costs that are routine are expensed.

F. Measurement Following Recognition

Following initial recognition, PPE is valued with:

• Cost model: Cost minus accumulated depreciation and impairment.
• Revaluation model (if applicable): At fair value on the date of revaluation, less any subsequent depreciation and impairment.

G. Illustrative Example

Suppose that a company acquires a machine for ₹50,00,000. An import duty of ₹5,00,000 is incurred, freight and installation expenses of ₹2,00,000, testing expense of ₹1,00,000, and revenue from trial run products worth ₹20,000. Also, there is an estimated dismantling liability of ₹3,00,000.

The total price of the machine can be determined as follows: ₹50,00,000 + ₹5,00,000 + ₹2,00,000 + (₹1,00,000 – ₹20,000) + ₹3,00,000 = ₹60,80,000.

Depreciation of PPE Under AS 10

Depreciation is the periodic assignment of an asset’s depreciable amount throughout its useful life. The amount depreciable is calculated by deducting the residual value from the cost (or revalued amount). Depreciation costs are usually entered in profit and loss accounts, except where they are added to the carrying amount of some other asset.

Fundamental steps needed under AS 10

1. Identify PPE items (either as a unit of measure or as aggregated pieces).
2. Compute the depreciable amount: cost (or revalued amount) less the residual value.
3. Evaluate usable life by estimating duration or output units.
4. Choose the most appropriate depreciation method depending on usage patterns.
5. Regularly allocate depreciable amounts for each reporting period and test estimates annually.

Instructions and examination on depreciable amount, residual value, and usable life:

1. Depreciable amount is the carrying amount (cost or amount revalued) reduced by the residual value.
2. Residual value is the estimated disposal proceeds at the termination of the useful life of the asset. According to Company Law Guidance (Schedule II), the residual value for corporations is generally capped at 5% of the initial cost, unless a justification is provided, and the useful lives outlined in Schedule II serve as a benchmark for companies. According to AS 10, management must make estimates and assess the residual value at the end of every year, with any changes being accounted for as a change in estimate.
3. The useful life represents the estimated time when an asset is available for production or utilisation. The estimates must be updated at least once a year; any changes are accounted for as changes in accounting estimates (prospectively).

Depreciation Methods (what is acceptable and how to choose)

There is no single method stipulated by AS 10. The method adopted should portray accurately the pattern in which future economic benefits are exploited. Acceptable methods are:

1. Straight Line Method (SLM) — uniform charge.
2. Diminishing Balance / Written Down Value (WDV) — diminishing charge.
3. Units of production (usage-based) — charge based on output or hours.

The selected approach should be consistently applied period to period except in the case of a substantive change in the pattern of expected consumption; that is, a change in accounting estimate treated prospectively with disclosure as required by AS 5.

Component accounting

Involves the depreciation of every major component of an object separately, considering its useful life and cost. For example, the engines and airframe of an aircraft. When a component is exchanged, the carrying amount is eliminated, and the cost of the replacement is capitalised if the recognition criteria are met.

Idle Assets / temporarily unused

1. Depreciation does not stop when an asset is idle. It goes on until the asset is completely depreciated; if a method of usage is utilised (e.g., units of production), the charge of depreciation could be zero when there is no production.
2. Disclosing why the asset is idle and the amount carried on such idle assets is strongly recommended.

Revaluations and their impact on depreciation

1. As per AS 10, a revaluation (or cost) model may be applied to a class of assets. When an asset is revalued, it is brought to its fair value, reduced by any subsequent depreciation and impairment.
2. Revaluation increments are transferred to revaluation surplus (equity), which has certain disclosure requirements; depreciation following revaluation is determined on the revalued carrying amount.
3. Transfers to revaluation surplus from retained earnings can occur while the asset is operating (transfer = depreciation on the revalued carrying amount – depreciation on the original cost).

Changes in estimate/method — accounting treatment

Changes in estimates (e.g., useful life, residual value, depreciation method, or pattern) are accounted for prospectively — outstanding depreciation is updated going forward, and the nature and effect of the change are disclosed as required by AS 5 and AS 10. There is no restatement of prior periods.

Interaction with impairment & derecognition

1. Evidence that the carrying amount will not be recoverable requires AS 28 (Impairment) to be used.
2. An impairment loss is to be recognised in profit or loss. Reversal rules under AS 28 if the asset becomes recoverable later.
3. On derecognition (sale or disposal), the gain or loss is calculated as the difference between proceeds and carrying amount, and this is realised in profit or loss.

Conclusion

AS 10 (Revised) – Property, Plant, and Equipment assists in ensuring a uniform accounting treatment for tangible fixed assets with an element of transparency and reliability.

The clear criteria for recognition, determining cost, depreciation, revaluation, impairment, and disclosures allow firms to assess their financial position truly and fairly.

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