Accounting Standard-10

Property, Plant and Equipment

(part-1)
 Formulation of AS 10
Property, Plant and
Equipment

■ Removal of AS 6 on Depreciation Accounting.

■ Introduction of a new AS 10 ‘Property, plant and

equipment’ in place of AS 10 ‘Accounting for fixed

assets’.
 Objective of the
standard
■ The objective of this Standard is to prescribe the accounting treatment for
property, plant and equipment.
■ Principal issues in accounting for property, plant and equipment are;

The
determination
Recognition of
of their
the asset.
carrying
amounts.

Impairment
losses to be
The charges of
recognized in
depreciation.
relation to the
asset.
Scope of standard
This Standard should be applied in accounting for property, plant and
equipment except when another Accounting Standard requires or
permits a different accounting treatment.
This standard does not apply to:

Biological assets related to Wasting assets including

agricultural activity other than mineral rights, expenditure on
bearer plants. This Standard the exploration for and
applies to bearer plants but it extraction of minerals, oils,
does not apply to the produce natural gas and similar non-
on bearer plants, and regenerative resources.
Definitions
Bearer plant is a plant that
(a)is used in the production or supply of agricultural
produce;
(b) is expected to bear produce for more than a
period of 12 months; and
(c)has a remote likelihood of being sold as
agricultural produce, except for incidental scrap
sales. (when the plant no longer bear produce,
they are cut down and sold as scrap eg. for use as
firewood)

Agricultural Produce is the harvested product of

biological assets of the enterprise

Biological Asset is a living animal or plant. It is a

Carrying amount is the amount at which an asset is
recognised after deducting any accumulated
depreciation and accumulated impairment losses.
(book value)

Gross carrying amount of an asset is its cost or

other amount substituted for the cost in the books of
account, without making any deduction for
accumulated depreciation and accumulated
impairment losses.

Cost is the amount of cash or cash equivalents paid or

the fair value of the other consideration given to
acquire an asset at the time of its acquisition or
construction.

Fair value is the amount for which an asset could be

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.

Residual value of an asset is the estimated amount

that an enterprise would currently obtain from disposal
of the asset, after deducting the estimated costs of
disposal, if the asset were already of the age and in
the condition expected at the end of its useful life.

Useful life is:

(a) the period over which an asset is expected to be
available for use by an enterprise ; or
(b)the number of production or similar units expected
to be obtained from the asset by an enterprise.
An impairment loss is the amount by which the
carrying amount of an asset exceeds its recoverable
amount.

Recoverable amount is the higher of an asset’s

net selling price and its value in use.

Property, plant and equipment are tangible

items that:

(a) are held for use in the production or supply of

goods or services, for rental to others, or for
administrative purposes; and,
(b)are expected to be used during more than a
period of 12 months. (Not held for sale in normal
course of business)

Eg, land, building, plant and machinery, furniture

 Recognition Criteria

The cost of an item of property, plant and equipment should be

recognised as an asset if, and only if:

a) it is probable that future economic benefits associated with the

item will flow to the enterprise and

b) Cost of the item can be measured reliably.

Recognition of Major Spare
parts, Stand-by equipment
and Servicing Equipments

If the definition of • Accounted as per AS 10 (treated

PPE is met as PPE)

• Accounted as per AS 2 ‘Valuation

If definition of PPE is
for Inventories’ (treated as
not met
inventory)
Under this recognition principle, all the costs on PPE shall be
evaluated by the enterprise at the time they are incurred.
The cost of PPE includes;
1. Initial Cost: cost incurred initially to acquire or construct the
PPE
2. Subsequent Cost: costs incurred subsequently to add to,
replace part of, or service it.
Initial costs

• Items of PPE may also be acquired for safety or

environmental reasons.
•The acquisition of such PPE, although not directly
increasing the future economic benefits, but may be
necessary for an enterprise to obtain the future
economic benefits from its other assets.
Such items of PPE qualify for recognition as assets.

Eg. a chemical manufacturer may install new

chemical handling processes to comply with
environmental requirements for the production and
storage of dangerous chemicals; associated plant
enhancements are recognised as an asset because
without them the enterprise is unable to
manufacture and sell chemicals.
Subsequent Costs

• Enterprise does not recognise the costs of the

day-today servicing in the carrying amount of an
item of PPE. Rather, these costs are recognised in the
statement of P&L as incurred under “repair &
maintenance”. Eg. costs of labour and consumables,
and may include cost of small parts.

• Enterprise recognises the cost of replacing

parts of an item of PPE in the carrying amount of
that item. Eg. a furnace may require relining after a
specified number of hours of use, or aircraft interiors
such as seats and galleys may require replacement
several times during the life of the airframe.

• Cost of performing major inspections is

Measurement at
Recognition
An item of property, plant and equipment that
qualifies for recognition as an asset should be
measured at its cost.
Elements of Cost
The cost of PPE comprises;

• Its purchase price, including import duties and non –refundable purchase
taxes,, after deducting trade discounts and rebates.

• Any costs directly attributable to bringing the asset to the location and
condition necessary for it to be capable of operating (eg. costs of site
preparation, initial delivery and handling costs, installation and assembly
costs, costs of testing whether the asset is functioning properly, professional
fees etc).

• The estimate of decommissioning, restoration and similar liabilities

(costs of dismantling, removing the item and restoring the site on which
it is located).
Costs not to be included (not
directly attributable) and therefore, must be
expensed in income statement
• Costs of opening a new facility or business, such as,
inauguration costs
• Costs of introducing a new product or service( including costs of
advertising and promotional activities)
• Costs of conducting business in a new location or with a new
class of customer (including costs of staff training)
• Administration and other general overhead costs
• Costs incurred while an item capable of being used as intended,
is yet to be brought into use, is left idle, or is operated at below
full capacity
• Initial operating losses, such as those incurred while demand for
the output of an item builds up

• Costs of relocating or reorganising part or all of the operations of

an enterprise

• Income and related expenses of operation that are incidental to

the construction or development of an item of PPE, should be
recognised in P&L because they are not necessary to bring an item
to location and condition necessary for its operation.
Eg. income may be earned through using a building site as a car
park until construction starts.
 Self Constructed
Assets
• Cost of Self-constructed Asset is determined using the same
principles as for an acquired asset.
• 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
• AS 16, Borrowing Costs, establishes criteria for the recognition of
interest as a component of the carrying amount of a self-constructed
item of PPE.
 Measurement of Cost
• The cost of an item of PPE is the cash price equivalent at the
recognition date.
(If payment is deferred beyond normal credit terms, the difference
between the cash price equivalent and the total payment is recognised as
interest over the period of credit unless such interest is capitalised in
accordance with AS 16).
• If asset is acquired in exchange, then PPE is measured at the fair value
unless the transaction lacks commercial substance or fair value of neither
the asset received nor the asset given up is reliably measured.
(An exchange transaction has commercial substance if the configuration
(risk, timing and amount) of the cash flows of the asset received differs
from the configuration of the cash flows of the asset transferred)
• Where several items of PPE are purchased for a consolidated price, the
consideration is apportioned to various items on the basis of their
respective fair values at the date of acquisition.