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UNIT 2: ACCOUNTING STANDARD 10
PROPERTY, PLANT AND EQUIPMENT

LEARNING OUTCOMES
After studying this unit, you will be able to comprehend the
 Definition of PPE
 What is the Recognition Criteria for PPE
• Initial Costs
• Subsequent Costs
 Measurement at Recognition
• What is included in elements of Cost
• Measurement of Cost
 Measurement after Recognition
• Cost Model
• Revaluation Model
 Depreciation
• Depreciable Amount and Useful life
• Depreciation Method
 Retirement in case of PPE
 Derecognition aspects
 Disclosure requirements.
 5.22 ADVANCED ACCOUNTING
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2.1 v INTRODUCTION
The objective of this Standard is to prescribe accounting treatment for Property,
Plant and Equipment (PPE).

Help the Information about

Prescribe Users of Investment in PPE
Objectives of "Accounting Financial
AS 10 (Revised) Treatment Statements
for PPE" to Changes in such
understand Investment

The principal issues in Accounting for PPE are:

Determination
Depreciation
of their carrying
charge
amounts

Impairment
Recognition of losses to be
PPE Principle recognised in
Issues in relation to
Accounting them
of PPE

2.2 SCOPE OF THE STANDARD

As a general principle, AS 10 (Revised) should be applied in accounting for PPE.
Exception:
When another Accounting Standard requires or permits a different accounting
treatment.
Example:
AS 19 on Leases, requires an enterprise to evaluate its recognition of an item of
leased PPE on the basis of the transfer of risks and rewards. However, it may be
noted that in such cases other aspects of the accounting treatment for these
assets, including depreciation, are prescribed by this Standard.
 5.23
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AS 10 (Revised)
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Not Applicable to

Biological Assets (other than Wasting Assets including Mineral

Bearer Plants) related to rights, Expenditure on the exploration
agricultural activity for and extraction of minerals, oil,
natural gas and similar non-
regenerative resources

Note: AS 10 (Revised) applies to Bearer Plants but it does not apply to the
produce on Bearer Plants.

Clarifications:
1. AS 10 (Revised) applies to PPE used to develop or maintain the assets
described above.
2. Investment property (defined in AS 13 (Revised)), should be accounted for
only in accordance with the Cost model prescribed in this standard.

2.3 DEFINITION OF PROPERTY, PLANT AND

EQUIPMENT (PPE)
There are 2 conditions to be satisfied for a TANGIBLE item to be called PPE. PPE
are tangible items that:

Use in Production or Supply

of Goods or Services, or
Condition 1:
Held for For Rental to others, or
PPE
For Administrative purposes
(Tangible Items)
Condition 2: Used for more than 12
Expected to be months

Note: Intangible items are covered under AS 26.

 5.24 ADVANCED ACCOUNTING
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“Administrative purposes”: The term ‘Administrative purposes’ has been used in
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wider sense to include all business purposes. Thus, PPE would include assets used
for:
• Selling and distribution
• Finance and accounting

• Personnel and other functions of an Enterprise.

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 of any particular existing item of PPE, 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 because they enable an
enterprise to derive future economic benefits from related assets in excess of
what could be derived had those items not been acquired.
Example:
A chemical manufacturer may install new chemical handling processes to comply
with environmental requirements for the production and storage of dangerous
chemicals; related plant enhancements are recognised as an asset because without
them the enterprise is unable to manufacture and sell chemicals.
The resulting carrying amount of such an asset and related assets is reviewed for
impairment in accordance with AS 28 ‘Impairment of Assets’.

2.4 OTHER DEFINITIONS

1. Biological Asset: An Accounting Standard on “Agriculture” is under
formulation, which will, inter alia, cover accounting for livestock. Till the
time, the Accounting Standard on “Agriculture” is issued, accounting for
livestock meeting the definition of PPE, will be covered as per AS 10
(Revised).
 5.25
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AS 10 (Revised) v
Living Animal does not apply if definition of
PPE not met
Biological Asset
AS 10 (Revised) applies to
Plant
Bearer Plants

2. Bearer Plant: Is a plant that (satisfies all 3 conditions):

Is used in the production or supply •Of Agricultural produce

•For more than a period of

Is expected to bear produce
12 months

Has a remote likelihood of being •Except for incidental scrap

sold as Agricultural produce sales

Note: When bearer plants are no longer used to bear produce they might be cut
down and sold as scrap. For example - use as firewood. Such incidental scrap
sales would not prevent the plant from satisfying the definition of a Bearer Plant.

What are not

"Bearer Plants"

Plants cultivated to be Plants cultivated to Produce when Annual Crops

harvested as Agricultural there is more than a remote
produce likelihood that the entity will also
harvest and sell the plant as
agricultural produce, other than as Maize and wheat
Trees grown for use as incidental scrap sales
lumber

Trees which are cultivated both for

their fruit and their lumber

Agricultural Produce is the harvested product of Biological Assets of the

enterprise.
 5.26 ADVANCED ACCOUNTING
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3. v
Agricultural Activity: Is the management by an Enterprise of:
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o Biological transformation; and

o Harvest of Biological Assets

• For sale, Or
• For conversion into Agricultural Produce, Or

• Into additional Biological Assets

For Sale
Biological
Agricultural transformation For Conversion into
Management Agriculture Produce
Activity and harvest of
Biological Assets
Into Additional
Biological Assets

2.5 RECOGNITION CRITERIA FOR PPE

The cost of an item of PPE should be recognised as an asset if, and only if:
o It is probable that future economic benefits associated with the item will
flow to the enterprise, and
o The cost of the item can be measured reliably.
Notes:
1. It may be appropriate to aggregate individually insignificant items, such as
moulds, tools and dies and to apply the criteria to the aggregate value.
2. An enterprise may decide to expense an item which could otherwise have
been included as PPE, because the amount of the expenditure is not
material.
Illustration 1 (Capitalising the cost of “Remodelling” a Supermarket)
Entity A, a supermarket chain, is renovating one of its major stores. The store will
have more available space for in store promotion outlets after the renovation and
will include a restaurant. Management is preparing the budgets for the year after
the store reopens, which include the cost of remodelling and the expectation of a
 5.27
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15% increase in sales resulting from the store renovations, which will attract new
customers. State whether the remodelling cost will be capitalised or not. v

Solution
The expenditure in remodelling the store will create future economic benefits (in
the form of 15% of increase in sales) and the cost of remodelling can be
measured reliably, therefore, it should be capitalised.
Treatment of Spare Parts, Stand by Equipment and Servicing
Equipment
Case I If they meet the definition of PPE as per AS 10 (Revised):
• Recognised as PPE as per AS 10 (Revised)
Case II If they do not meet the definition of PPE as per AS 10 (Revised):
• Such items are classified as Inventory as per AS 2 (Revised)
When do we apply the above criteria for Recognition?
An enterprise evaluates under this recognition principle all its costs on PPE at the
time they are incurred.
These costs include costs incurred:

Situation I To acquire or construct an

Initially item of PPE
Cost Incurred
Situation II To add to, replace part of,
Subsequently or service it

2.6 MEASUREMENT OF PPE

Cost Model
At Recognition
Measurement Cost Model
After Recognition
Revaluation Model
 5.28 ADVANCED ACCOUNTING
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2.7v INITIAL RECOGNITION
An item of PPE that qualifies for recognition as an asset should be measured at its
cost.
What are the elements of Cost?
Cost of an item of PPE comprises:

Cost of an Item of
PPE

Includes Excludes

Any Directly Decommissioning, 1. Costs of opening a new

Purchase
Attributable Restoration and facility or business (Such as,
Price
Costs similar Liabilities Inauguration costs)
2. Costs of introducing a new
product or service (including
costs of advertising and
promotional activities)
3. Costs of conducting
business in a new location or
with a new class of customer
(including costs of staff
training)
4. Administration and other
general overhead costs

Let us understand the above in detail.

A. Purchase Price:
• It includes import duties and non –refundable purchase taxes.

• It requires deduction of Trade discounts and rebates

B. Directly Attributable Costs:
Any costs directly attributable to bringing the asset to the ‘location and condition’
necessary for it to be capable of operating in the manner intended by
management. Recognition of costs in the carrying amount of an item of PPE
 5.29
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ceases when the item is in the location and condition necessary for it to be
capable of operating in the manner intended by management. v

The following costs are not included in the carrying amount of an item of PPE:
1. Costs incurred while an item capable of operating in the manner intended
by management has yet to be brought into use or is operated at less than
full capacity.
2. Initial operating losses, such as those incurred while demand for the output
of an item builds up. And

3. Costs of relocating or reorganising part or all of the operations of an

enterprise.
Examples of directly attributable costs are:

1. Costs of employee benefits (as defined in AS 15) arising directly from the
construction or acquisition of the item of PPE
2. Costs of site preparation
3. Initial delivery and handling costs
4. Installation and assembly costs
5. Costs of testing whether the asset is functioning properly, after deducting the
net proceeds from selling any items produced while bringing the asset to that
location and condition (such as samples produced when testing equipment)
6. Professional fees

Examples of costs that are not costs of an item of property, plant and
equipment are:
(a) costs of opening a new facility or business, such as, inauguration costs

(b) costs of introducing a new product or service (including costs of advertising

and promotional activities)
(c) costs of conducting business in a new location or with a new class of
customer (including costs of staff training)
(d) administration and other general overhead costs
 5.30 ADVANCED ACCOUNTING
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Note: Some operations occur in connection with the construction or
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development of an item of PPE but are not necessary to bring the item to the
location and condition necessary for it to be capable of operating in the manner
intended by management. These incidental operations may occur before or
during the construction or development activities.

Example:
Income may be earned through using a building site as a car park until
construction starts because incidental operations are not necessary to bring an it em
to the location and condition necessary for it to be capable of operating in the
manner intended by management, the income and related expenses of incidental
operations are recognised in the Statement of Profit and Loss and included in their
respective classifications of income and expense.

Income earned during

development of PPE

Directly Attributable
Incomes (e.g. sale of Not directly attriubtable
debris/ scrap material to the asset (e.g. car
on demolition in case parking rental income)
of redevelopment

Recognize as income in
Adjust from the cost of the Statement of Profit
PPE and Loss

Illustration 2
Entity A has an existing freehold factory property, which it intends to knock down
and redevelop. During the redevelopment period the company will move its
production facilities to another (temporary) site. The following incremental costs
will be incurred:
1. Setup costs of ` 5,00,000 to install machinery in the new location.
2. Rent of ` 15,00,000
 5.31
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3. v
Removal costs of ` 3,00,000 to transport the machinery from the old location
to the temporary location. v

Can these costs be capitalised into the cost of the new building?
Solution
Constructing or acquiring a new asset may result in incremental costs that would
have been avoided if the asset had not been constructed or acquired. These costs are
not to be included in the cost of the asset if they are not directly attributable to
bringing the asset to the location and condition necessary for it to be capable of
operating in the manner intended by management. The costs to be incurred by the
company are in the nature of costs of relocating or reorganising operations of the
company and do not meet the requirement of AS 10 (Revised) and therefore, cannot
be capitalised.
Illustration 3
Omega Ltd. contracted with a supplier to purchase machinery which is to be
installed in its one department 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 ` 1,40,000. These
activities were supervised by a technician during the entire period, who is employed
for this purpose of ` 45,000 per month. The machine was purchased at `
1,58,00,000 and ` 50,000 transportation charges were incurred to bring the
machine to the factory site. An Architect was appointed at a fee of ` 30,000 to
supervise machinery installation at the factory site. You are required to ascertain
the amount at which the Machinery should be capitalized.
Solution
Particulars `
Purchase Price Given 1,58,00,000
Add: Site Preparation Cost Given 1,40,000
Technician’s Salary Specific/Attributable overheads 1,35,000
for 3 months (45,000 x 3)
Initial Delivery Cost Transportation 50,000
Professional Fees for Architect’s Fees 30,000
Installation
Total Cost of Machinery 1,61,55,000
 5.32 ADVANCED ACCOUNTING
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Illustration
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Entity A, which operates a major chain of supermarkets, has acquired a new store
location. The new location requires significant renovation expenditure.
Management expects that the renovations will last for 3 months during which the
supermarket will be closed.

Management has prepared the budget for this period including expenditure related
to construction and remodelling costs, salaries of staff who will be preparing the
store before its opening and related utilities costs. What will be the treatment of
such expenditures?
Solution
Management should capitalise the costs of construction and remodelling the
supermarket, because they are necessary to bring the store to the condition
necessary for it to be capable of operating in the manner intended by
management. The supermarket cannot be opened without incurring the
remodelling expenditure, and thus the expenditure should be considered part of
the asset.
However, if the cost of salaries, utilities and storage of goods are in the nature of
operating expenditure that would be incurred if the supermarket was open, then
these costs are not necessary to bring the store to the condition necessary for it
to be capable of operating in the manner intended by management and should
be expensed.
Illustration 5 (Operating costs incurred in the start-up period)
An amusement park has a 'soft' opening to the public, to trial run its attractions.
Tickets are sold at a 50% discount during this period and the operating capacity is
80%. The official opening day of the amusement park is three months later.
Management claim that the soft opening is a trial run necessary for the amusement
park to be in the condition capable of operating in the intended manner.
Accordingly, the net operating costs incurred should be capitalised. Comment.
Solution
The net operating costs should not be capitalised but should be recognised in the
Statement of Profit and Loss.
 5.33
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Even though it is running at less than full operating capacity (in this case 80% ofv
operating capacity), there is sufficient evidence that the amusement park vis
capable of operating in the manner intended by management. Therefore, these
costs are specific to the start-up and, therefore, should be expensed as incurred.
C. Decommissioning, Restoration and similar Liabilities:
Initial estimate of the costs of dismantling, removing the item and restoring the
site on which it is located, referred to as ‘Decommissioning, Restoration and
similar Liabilities’, the obligation for which an enterprise incurs either when the
item is acquired or as a consequence of having used the item during a particular
period for purposes other than to produce inventories during that period.
Exception: An enterprise applies AS 2 (Revised) “Valuation of Inventories”, to the
costs of obligations for dismantling, removing and restoring the site on which an
item is located that are incurred during a particular period as a consequence of
having used the item to produce inventories during that period.
Note: The obligations for costs accounted for in accordance with AS 2 (Revised)
or AS 10 (Revised) are recognised and measured in accordance with AS 29
(Revised) “Provisions, Contingent Liabilities and Contingent Assets”.

2.8 COST OF A SELF-CONSTRUCTED ASSET

Cost of a self-constructed asset is determined using the same principles as for an
acquired asset.

1. If an enterprise makes similar assets for sale in the normal course of

business, the cost of the asset is usually the same as the cost of
constructing an asset for sale (Refer AS 2). Therefore, any internal profits are
eliminated in arriving at such costs.
2. Cost of abnormal amounts of wasted material, labour, or other resources
incurred in self constructing an asset is not included in the cost of the asset.
3. AS 16 on Borrowing Costs, establishes criteria for the recognition of interest
as a component of the carrying amount of a self-constructed item of PPE.
4. 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.
 5.34 ADVANCED ACCOUNTING
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v Summary: Initial Recognition
(COST)

Purchase Self-constructed

Purchase Price xxx

Material xxx
+ non-creditable taxes xxx
+ Labour xxx
- Trade discount xxx
+ Fixed/Variable Prod. Overheads xxx
+ Directly attributable Expense/Income xxx
+ Directly attributabel Exp/Income xxx
+ Initial Estimate of Restoration etc. xxx
+ Initial Estimate of Restoration etc. xxx
COST OF ASSET xxx
+ Borrowing Cost (if qualifying asset) xxx
COST OF ASSET xxx

2.9 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:

(a) Exchange transaction lacks commercial substance; or

(b) Fair value of neither the asset(s) received nor the asset(s) given up is reliably
measurable.
 5.35
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1. The acquired item(s) is/are measured in this manner even if an enterprise
cannot immediately derecognise the asset given up.

2. The fair value of an asset is reliably measurable if (a) the variability in the range
of reasonable fair value measurements is not significant for that asset or (b) the
probabilities of the various estimates within the range can be reasonably
assessed and used when measuring fair value. If an enterprise is able to
measure reliably the fair value of either the asset received or the asset given
up, then the fair value of the asset given up is used to measure the cost of the
asset received unless the fair value of the asset received is more clearly evident.

3. If the acquired item(s) is/are not measured at fair value, its/their cost is
measured at the carrying amount of the asset(s) given up.

4. An enterprise determines whether an exchange transaction has commercial

substance by considering the extent to which its future cash flows are expected
to change as a result of the transaction. An exchange transaction has
commercial substance if:

(a) 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; or

(b) the enterprise-specific value of the portion of the operations of the

enterprise affected by the transaction changes as a result of the
exchange;

(c) and the difference in (a) or (b) is significant relative to the fair value of
the assets exchanged.

For the purpose of determining whether an exchange transaction has

commercial substance, the enterprise-specific value of the portion of
operations of the enterprise affected by the transaction should reflect post-
tax cash flows. In certain cases, the result of these analyses may be clear
without an enterprise having to perform detailed calculations.
 5.36 ADVANCED ACCOUNTING
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Acquisition of Assets for non-
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consideration

Transaction has Transaction has no

Commercial Substance Commercial Substance

Cost of such PPE is measured at Fair A transaction lacks commercial substance if

Value (FV) of the assets given up the position of the company (in terms of
unless the FV of the asset received is cash flows or enterprise-specific values)
more reliable. before and after the exchange transaction
reamin the same.
If information about reliability is not
available, the following order of
preference for recording PPE can be
followed:
In such cases, the assets
1. Measure at FV of asset given up.
acquired will be measured at
2. Measure at FV of assets received (if the WDV of the assets given up.
FV of asset given up is not available).
3. WDV of assets given up (ONLY if
Points 1 and 2 are not available, which
is a very remote possibility).

Illustration 6 (Consideration received comprising a combination of

non-monetary and monetary assets)
Entity A exchanges land with a book value of ` 10,00,000 for cash of ` 20,00,000
and plant and machinery valued at ` 25,00,000. What will be the measurement cost
of the assets received. (Consider that the transaction has commercial substance)?
Solution
In the given case, Plant & Machinery is valued at ` 25,00,000, which is assumed to
be fair value in absence of information. Further, since fair value of land (asset
given up) is not given, the transaction will be recorded at fair value of assets
acquired of ` 45,00,000 (` Cash 20,00,000 + ` Plant & Machinery 25,00,000). Since
land of book value ` 10,00,000 is transferred in exchange of assets worth
` 45,00,000, a gain of ` 35,00,000 will be recognised in the books of Entity A.
 5.37
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The following journal entry will be passed in the books of Entity A: v
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Cash/ Bank A/c Dr. 20,00,000
Plant & Machinery A/c Dr. 25,00,000
To Land 10,00,000
To Profit on Sale of Land (balancing figure) 35,00,000
Illustration 7 (Exchange of assets that lack commercial substance)
Entity A exchanges car X with a book value of ` 13,00,000 and a fair value of
` 13,25,000 for cash of ` 15,000 and car Y which has a fair value of ` 13,10,000.
The transaction lacks commercial substance as the company’s cash flows are not
expected to change as a result of the exchange. It is in the same position as it was
before the transaction. What will be the measurement cost of the assets received?
Solution
Since the transaction lacks commercial substance, the entity recognises the assets
received at the book value of car X. Therefore, it recognises cash of ` 15,000 and
car Y as PPE with a carrying value of ` 12,85,000.
The following journal entry will be passed in the books of Entity A:
Cash/ Bank A/c Dr. 15,000
Car Y A/c (balancing figure) Dr. 12,85,000
To Car X A/c 13,00,000
Determination of Cost in special cases:
Cost of an item of PPE is the cash price equivalent at the recognition date.
A. If payment is deferred beyond normal credit terms:
Total payment minus Cash price equivalent
• is recognised as an interest expense over the period of credit
• unless such interest is capitalised in accordance with AS 16
B. PPE purchased for a Consolidated Price:
Where several items of PPE are purchased for a consolidated price, the
consideration is apportioned to the various items on the basis of their
respective fair values at the date of acquisition.
 5.38 ADVANCED ACCOUNTING
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Note: In case the fair values of the items acquired cannot be measured
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reliably, these values are estimated on a fair basis as determined by
competent valuers.
C. PPE held by a lessee under a Finance Lease:
The cost of an item of PPE held by a lessee under a finance lease is
determined in accordance with AS 19 (Leases).
D. Government Grant related to PPE:
The carrying amount of an item of PPE may be reduced by government
grants in accordance with AS 12 (Accounting for Government Grants).

2.10 TREATMENT OF SUBSEQUENT COSTS

Cost of day-to-day servicing
Meaning

Costs of day-to-day servicing are primarily the costs of labour and consumables
and may include the cost of small parts. The purpose of such expenditures is
often described as for the ‘Repairs and Maintenance’ of the item of PPE.

Accounting Treatment:

An enterprise does not recognise in the carrying amount of an item of PPE the
costs of the day-to-day servicing of the item. Rather, these costs are recognised
in the Statement of Profit and Loss as incurred.

Replacement of Parts of PPE

Parts of some items of PPE may require replacement at regular intervals.

Examples
1. A furnace may require relining after a specified number of hours of use.

2. Aircraft interiors such as seats and galleys may require replacement several
times during the life of the airframe.

3. Major parts of conveyor system, such as, conveyor belts, wire ropes, etc.,
may require replacement several times during the life of the conveyor
system.
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4. v
Replacing the interior walls of a building, or to make a non-recurring
replacement. v

Accounting Treatment

An enterprise recognises in the carrying amount of an item of PPE the cost of

replacing part of such an item when that cost is incurred if the recognition criteria are
met.

Note: The carrying amount of those parts that are replaced is derecognised in
accordance with the de-recognition provisions of this Standard.

Regular Major Inspections - Accounting Treatment

In certain cases, a condition of continuing to operate an item of property, plant and
equipment (for example, an aircraft) may be performing regular major inspections for
faults regardless of whether parts of the item are replaced. When each such major
inspection is performed, its cost is recognised in the carrying amount of the item of
PPE as a replacement, if the recognition criteria are satisfied.

Any remaining carrying amount of the cost of the previous inspection (as distinct
from physical parts) is derecognised.

Subsequent
Expenditure

Expenses which
increase life or Major replacements / major
Regular / day-to-day
efficiency of the asset inspection / major overhaul
Repairs & Maintenance
beyond the originally
assessed life or
efficiency

Capitalized as under:
Expensed to P/L WDV of Asset xxx
Capitalized + Cost of New Part xxx
- WDV of Old Part xxx
Revised WDV xxx
 5.40 ADVANCED ACCOUNTING
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The WDV of the old part / inspection (in case of major replacements / inspection)
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can be determined through the following sources (in order of preference):

(i) Breakup from suppliers’ invoice

(ii) Fair value of the part / inspection at the time of purchase
If it is not practicable for an enterprise to determine the carrying amount of the
replaced part/ inspection, it may use the cost of the replacement or the estimated
cost of a future similar inspection as an indication of what the cost of the
replaced part/ existing inspection component was when the item was acquired or
constructed.
The WDV of the old part / inspection is computed after deducting the applicable
depreciation.

Illustration 8

What happens if the cost of the previous part/inspection was/ was not identified in
the transaction in which the item was acquired or constructed?

Solution

De-recognition of the carrying amount occurs regardless of whether the cost of

the previous part/inspection was identified in the transaction in which the item
was acquired or constructed.

Illustration 9
What will be your answer in the above question, if it is not practicable for an
enterprise to determine the carrying amount of the replaced part/inspection?
Solution
It may use the cost of the replacement or the estimated cost of a future similar
inspection as an indication of what the cost of the replaced part/existing
inspection component was when the item was acquired or constructed.
MEASUREMENT AFTER RECOGNITION
An enterprise should choose
• Either Cost model,

• Or Revaluation model
 5.41
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as its accounting policy and should apply that policy to an entire class of PPE. v
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Class of PPE: A class of PPE is a grouping of assets of a similar nature and use in
operations of an enterprise.
Examples of separate classes:
(a) Land (b) Land and Buildings

(c) Machinery (d) Ships

(e) Aircraft (f) Motor Vehicles
(g) Furniture and Fixtures (h) Office Equipment

(j) Bearer plants

Cost Model
After recognition as an asset, an item of PPE should be carried at:
Cost- Any Accumulated Depreciation- Any Accumulated Impairment losses
Revaluation Model
After recognition as an asset, an item of PPE whose fair value can be measured
reliably should be carried at a revalued amount.
Fair value at the date of the revaluation —
Less: Any subsequent accumulated depreciation (—)
Less: Any subsequent accumulated impairment losses (—)
Carrying value —
Revaluation for entire class of PPE
If an item of PPE is revalued, the entire class of PPE to which that asset belongs
should be revalued.
Reason
The items within a class of PPE are revalued simultaneously to avoid selective
revaluation of assets and the reporting of amounts in the Financial Statements
that are a mixture of costs and values as at different dates. It will ensure true and
fair view of financial statements.
 5.42 ADVANCED ACCOUNTING
v
v
v 10 (Revaluation on a class by class basis)
Illustration
v
Entity A is a large manufacturing group. It owns a number of industrial buildings, such
as factories and warehouses and office buildings in several capital cities. The industrial
buildings are located in industrial zones, whereas the office buildings are in central
business districts of the cities. Entity A's management want to apply the revaluation
model as per AS 10 (Revised) to the subsequent measurement of the office buildings
but continue to apply the historical cost model to the industrial buildings.
State whether this is acceptable under AS 10 (Revised) or not with reasons?
Solution
Entity A's management can apply the revaluation model only to the office
buildings. The office buildings can be clearly distinguished from the industrial
buildings in terms of their function, their nature and their general location.AS 10
(Revised) permits assets to be revalued on a class by class basis.
The different characteristics of the buildings enable them to be classified as
different PPE classes. The different measurement models can, therefore, be
applied to these classes for subsequent measurement.
However, all properties within the class of office buildings must be carried at
revalued amount.
Frequency of Revaluations
Revaluations should be made with sufficient regularity to ensure that the carrying
amount does not differ materially from that which would be determined using
Fair value at the Balance Sheet date.
The frequency of revaluations depends upon the changes in fair values of the
items of PPE being revalued.
 5.43
ASSETS BASED ACCOUNTING STANDARDS
v
v v
Frequency of Revaluations v
(Sufficient Regularity) v

Items of PPE experience significant Items of PPE with only insignificant

and volatile changes in Fair value changes in Fair value

Revalue the item only every 3 or 5

Annual revaluation
years

Determination of Fair Value

Fair value of items of PPE is usually determined from market-based evidence by
appraisal that is normally undertaken by professionally qualified valuers.
If there is no market-based evidence of fair value because of the specialised
nature of the item of PPE and the item is rarely sold, except as part of a
continuing business, an enterprise may need to estimate fair value using an
income approach Based on (Discounted cash flow projections) Ora depreciated
replacement cost approach which aims at making a realistic estimate of the
current cost of acquiring or constructing an item that has the same service
potential as the existing item.
Accounting Treatment of Revaluations
When an item of PPE is revalued, the carrying amount of that asset is adjusted to
the revalued amount.
At the date of the revaluation, the asset is treated in one of the following ways:

A. Technique 1: Gross carrying amount is adjusted in a manner that is

consistent with the revaluation of the carrying amount of the asset.
Gross carrying amount

• May be restated by reference to observable market data, or

• May be restated proportionately to the change in the carrying amount.

Accumulated depreciation at the date of the revaluation is

• Adjusted to equal the difference between the gross carrying amount

and the carrying amount of the asset after taking into account
accumulated impairment losses
 5.44 ADVANCED ACCOUNTING
v
v
v
Case Study on Technique I
v
PPE is revalued to ` 1,500 consisting of ` 2,500 Gross cost and ` 1,000
Depreciation based on observable market data.

Details of the PPE before and after revaluation are as follows:

Particulars Cost/ Accumulated Net book

Revalued depreciation value
Cost

PPE before revaluation (assumed) 1,000 400 600

Fair Value 1,500
Revaluation Gain 900

Gain allocated proportionately to 1,500 600 900

cost and depreciation (900 x 1,000/600) (900 x 400/600)

PPE after revaluation 2,500 1,000 1,500

The increase on revaluation is ` 900 (i.e., ` 1,500 – ` 600).

The following journal entry will be passed:

PPE Dr. 1,500

To Accumulated Depreciation 600

To Gain on Revaluation* 900

* Accounting treatment discussed later

B. Technique 2: Accumulated depreciation Is eliminated against the Gross

Carrying amount of the asset

Case Study on Technique II

(Taking the information given in the above Example)

 5.45
ASSETS BASED ACCOUNTING STANDARDS
v
v v
Details of the PPE before and after revaluation are as follows: v
v
Particulars Cost/Revalued Accumulated Net book value
Cost depreciation

PPE before 1,000 400 600

revaluation
(assumed)

PPE after 1,500 1,500

revaluation

Revaluation gain 500 400

The increase on revaluation is ` 900 (i.e., ` 500 + ` 400).

The following journal entries will be passed:

Accumulated Depreciation Dr. 400

To PPE 400

(Accumulated depreciation eliminate against gross carrying amount of asset)

Therefore, carrying amount of asset is reduced to = 1,000 – 400 = 600

PPE Dr. 900

To Gain on Revaluation* 900

* Gain on Revaluation 1,500 – 600 = 900 recognized entirely in PPE, accounting

treatment of this gain to be discussed later.
 5.46 ADVANCED ACCOUNTING
v
v
v
Revaluation – Increase or Decrease
v
Revaluation

Increase Decrease

Credited directly Exception:

Exception: Charged to
to owners’
When it is the Statement When it is subsequently
interests under
subsequently of profit and Decreased (Initially
the heading of
Increased loss Increased)
Revaluation
surplus (Initially
Decreased)
Decrease should be
debited directly to
owners’ interests under
Recognised in the Statement of
the heading of
profit and loss to the extent that it
Revaluation surplus to the
reverses a revaluation decrease of
extent of any credit
the same asset previously
balance existing in the
recognised in the Statement of
Revaluation surplus in
profit and loss
respect of that asset

Treatment of Revaluation Surplus

The revaluation surplus included in owners’ interests in respect of an item of PPE
may be transferred to the Revenue Reserves when the asset is derecognised.

Case I: When whole surplus is transferred:

When the asset is:
• Retired; Or

• Disposed of
Case II: Some of the surplus may be transferred as the asset is used by an
enterprise:

In such a case, the amount of the surplus transferred would be:

Depreciation (based on Revalued Carrying amount) – Depreciation
(based on Original Cost)

Transfers from Revaluation Surplus to the Revenue Reserves are not made
through the Statement of Profit and Loss.
 5.47
ASSETS BASED ACCOUNTING STANDARDS
v
v v
Depreciation v
v
Component Method of Depreciation:

Each part of an item of PPE with a cost that is significant in relation to the total
cost of the item should be depreciated separately. An enterprise allocates the
amount initially recognised in respect of an item of PPE to its significant parts and
depreciates each such part separately.
Example:
It may be appropriate to depreciate separately the airframe and engines of an
aircraft, whether owned or subject to a finance lease.
Is Grouping of Components possible?
Yes. A significant part of an item of PPE may have a useful life and a depreciation
method that are the same as the useful life and the depreciation method of another
significant part of that same item. Such parts may be grouped in determining the
depreciation charge.
Accounting Treatment
Depreciation charge for each period should be recognised in the Statement of
Profit and Loss unless it is included in the carrying amount of another asset.
Examples on Exception
AS 2 (Revised): Depreciation of manufacturing plant and equipment is included in
the costs of conversion of inventories as per AS 2 (Revised).

AS 26: Depreciation of PPE used for development activities may be included in the
cost of an intangible asset recognised in accordance with AS 26 on Intangible Assets.
Depreciable Amount and Depreciation Period

Depreciable amount is:

Cost of an asset (or other amount substituted for cost i.e. revalued amount) less
Residual value.

The depreciable amount of an asset should be allocated on a systematic basis

over its useful life.
 5.48 ADVANCED ACCOUNTING
v
v
v is:
Useful life
v
(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.

The 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.

All the following factors are considered in determining the useful life of an
asset:

(a) expected usage of the asset. Usage is assessed by reference to the

expected capacity or physical output of the asset.

(b) expected physical wear and tear, which depends on operational factors
such as the number of shifts for which the asset is to be used and the repair
and maintenance programme, and the care and maintenance of the asset
while idle.

(c) technical or commercial obsolescence arising from changes or

improvements in production, or from a change in the market demand for
the product or service output of the asset. Expected future reductions in the
selling price of an item that was produced using an asset could indicate the
expectation of technical or commercial obsolescence of the asset, which, in
turn, might reflect a reduction of the future economic benefits embodied in
the asset.

(d) legal or similar limits on the use of the asset, such as the expiry dates of
related leases.

Illustration 11
Entity A has a policy of not providing for depreciation on PPE capitalised in the year
until the following year, but provides for a full year's depreciation in the year of
disposal of an asset. Is this acceptable?
 5.49
ASSETS BASED ACCOUNTING STANDARDS
v
v v
Solution v
v
The depreciable amount of a tangible fixed asset should be allocated on a
systematic basis over its useful life. The depreciation method should reflect the
pattern in which the asset's future economic benefits are expected to be
consumed by the entity.
Useful life means the period over which the asset is expected to be available for
use by the entity. Depreciation should commence as soon as the asset is acquired
and is available for use. Thus, the policy of Entity A is not acceptable.
Review of Residual Value and Useful Life of an Asset
Residual value and the useful life of an asset should be reviewed at least at each
financial year-end and, 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 ‘Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies’.
Example:
As per accounting policy of NS Limited, engaged in shipping business, residual
value of Steel containers is 5%. Based on the external factors, steel prices have
increased in recent past and based on the recent data, company has observed that
realized scrap value is approximately 10% of the cost of the container. The
company does not anticipate any material movement in the steel price in the
foreseeable future.
In the above case, based on the yearly review of residual value of Steel containers,
company should revise the residual value to 10%. The above change shall be
treated as change in accounting estimate as per AS 5 and should be applied
prospectively.
Illustration 12 (Change in estimate of useful life)
Entity A purchased an asset on 1 st January 20X1 for ` 1,00,000 and the asset had an
estimated useful life of 10 years and a residual value of nil.
On 1st January 20X5, the directors review the estimated life and decide that the
asset will probably be useful for a further 4 years.
Calculate the amount of depreciation for each year, if company charges
depreciation on Straight Line basis.
 5.50 ADVANCED ACCOUNTING
v
v
Solutionv
v
The entity has charged depreciation using the straight-line method at ` 10,000
per annum i.e (1,00,000/10 years).

On 1st January 20X5, the asset's net book value is [1,00,000 – (10,000 x 4)]
` 60,000.

The remaining useful life is 4 years.

The company should amend the annual provision for depreciation to charge the
unamortised cost over the revised remaining life of four years.

Consequently, it should charge depreciation for the next 4 years at ` 15,000 per
annum i.e. (60,000 / 4 years).

Note: Depreciation is recognised even if the Fair value of the Asset exceeds its
Carrying Amount. Repair and maintenance of an asset do not negate the need to
depreciate it.

Commencement of period for charging Depreciation

Depreciation of an asset begins when it is available for use, i.e., when it is in the
location and condition necessary for it to be capable of operating in the manner
intended by the management.

Illustration 13

Entity B constructs a machine for its own use. Construction is completed on 1 st

November 20X1 but the company does not begin using the machine until 1 st March
20X2. Comment.

Solution
The entity should begin charging depreciation from the date the machine is ready
for use – that is, 1st November 20X1. The fact that the machine was not used for a
period after it was ready to be used is not relevant in considering when to begin
charging depreciation.
 5.51
ASSETS BASED ACCOUNTING STANDARDS
v
v v
Cessation of Depreciation v
v
I. Depreciation ceases to be charged when asset’s residual value exceeds
its carrying amount.
The residual value of an asset may increase to an amount equal to or greater than
its carrying amount. If it does, depreciation charge of the asset is zero unless and
until its residual value subsequently decreases to an amount below its carrying
amount.
Illustration 14 (Depreciation where residual value is the same as or close to
Original cost)
A property costing ` 10,00,000 is bought in 20X1. Its estimated total physical life is
50 years. However, the company considers it likely that it will sell the property after
20 years.
The estimated residual value in 20 years' time, based on 20X1 prices, is:
Case (a) ` 10,00,000
Case (b) ` 9,00,000.
Calculate the amount of depreciation.
Solution
Case (a)
The company considers that the residual value, based on prices prevailing at the
balance sheet date, will equal the cost.
There is, therefore, no depreciable amount and depreciation is correctly zero.
Case (b)
The company considers that the residual value, based on prices prevailing at the
balance sheet date, will be ` 9,00,000 and the depreciable amount is, therefore,
` 1,00,000.
Annual depreciation (on a straight-line basis) will be ` 5,000 [{10,00,000 –
9,00,000} ÷ 20].
II. 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.
 5.52 ADVANCED ACCOUNTING
v
v
v
Therefore, depreciation does not cease when the asset becomes idle or is retired
v
from active use (but not held for disposal) unless the asset is fully depreciated.

However, under usage methods of depreciation, the depreciation charge can be

zero while there is no production.
Land and Buildings

Land and buildings are separable assets and are accounted for separately, even
when they are acquired together.
A. Land: Land has an unlimited useful life and therefore is not depreciated.

Exceptions: Quarries and sites used for landfill.

Depreciation on Land:
I. If land itself has a limited useful life:

It is depreciated in a manner that reflects the benefits to be derived from it.

II. If the cost of land includes the costs of site dismantlement, removal
and restoration:
That portion of the land asset is depreciated over the period of
benefits obtained by incurring those costs.
B. Buildings:
Buildings have a limited useful life and therefore are depreciable assets.
An increase in the value of the land on which a building stands does not
affect the determination of the depreciable amount of the building.
Depreciation Method
The enterprise selects the method that most closely reflects the expected pattern
of consumption of the future economic benefits embodied in the asset. 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.
The method selected is applied consistently from period to period unless:
• There is a change in the expected pattern of consumption of those future
economic benefits; Or
 5.53
ASSETS BASED ACCOUNTING STANDARDS
v
v v
• v
That the method is changed in accordance with the statute to best reflect
the way the asset is consumed. v

Methods of Depreciation

Straight-line Diminishing Units of Production

Method Balance Method Method

Results in a constant Results in a Results in a

charge over the useful decreasing charge charge based on
life if the residual value over the useful the expected use
of the asset does not life or output
change

Review of Depreciation Method

The depreciation method applied to an asset should be reviewed at least at each
financial year-end and, 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.
Depreciation Method based on Revenue
A depreciation method that is based on revenue that is generated by an activity
that includes the use of an asset is not appropriate. Because the price component
of revenue may be affected by inflation, which has no bearing upon the way in
which an asset is consumed.
Illustration 15 (Determination of appropriate Depreciation Method)
Entity B manufactures industrial chemicals and uses blending machines in the
production process. The output of the blending machines is consistent from year to
year and they can be used for different products.
However, maintenance costs increase from year to year and a new generation of
machines with significant improvements over existing machines is available every 5
years. Suggest the depreciation method to the management.
 5.54 ADVANCED ACCOUNTING
v
v
Solutionv
v
The straight-line depreciation method should be adopted, because the
production output is consistent from year to year.

Factors such as maintenance costs or technical obsolescence should be

considered in determining the blending machines’ useful life.

Changes in Existing Decommissioning, Restoration and other Liabilities

The cost of PPE may undergo changes subsequent to its acquisition or

construction on account of:

• Changes in Liabilities

• Price Adjustments

• Changes in Duties

• Changes in initial estimates of amounts provided for Dismantling, Removing,

Restoration, and

• Similar factors

The above are included in the cost of the asset.

Accounting for the above changes:

Related Asset is measured using Cost

Accounting Model

(Depends upon) Related Asset is measured using

Revaluation Model

A. If the related asset is measured using the Cost model

Changes in the Liability should be added to, or deducted from, the cost of
the related asset in the current period

Note: Amount deducted from the cost of the asset should not exceed its
carrying amount. If a decrease in the liability exceeds the carrying amount of
the asset, the excess should be recognised immediately in the Statement of
Profit and Loss.
 5.55
ASSETS BASED ACCOUNTING STANDARDS
v
v v
If the adjustment results in an addition to the cost of an asset v
v
• Enterprise should consider whether this is an indication that the new
carrying amount of the asset may not be fully recoverable.

Note: If it is such an indication, the enterprise should test the asset for
impairment by estimating its recoverable amount, and should account for
any impairment loss, in accordance with applicable Accounting standards.

B. If the related asset is measured using the Revaluation model:

Changes in the liability alter the revaluation surplus or deficit previously
recognised on that asset, so that:
(i) Decrease in the liability credited directly to revaluation surplus in the
owners’ interest

Exception
*It should be recognised in the Statement of Profit and Loss to the
extent that it reverses a revaluation deficit on the asset that was
previously recognised in the Statement of Profit and Loss.

Note: In the event that a decrease in the liability exceeds the carrying
amount that would have been recognised had the asset been carried
under the cost model, the excess should be recognised immediately in
the Statement of Profit and Loss.

(ii) Increase in the liability should be recognised in the Statement of Profit

and Loss
Exception
*It should be debited directly to Revaluation surplus in the owners’
interest to the extent of any credit balance existing in the Revaluation
surplus in respect of that asset
Caution

A change in the liability is an indication that the asset may have to be

revalued in order to ensure that the carrying amount does not differ
materially from that which would be determined using fair value at the
balance sheet date.
 5.56 ADVANCED ACCOUNTING
v
v
v The adjusted depreciable amount of the asset is depreciated over its
v
useful life.

What happens if the related asset has reached the end of its useful
life?
All subsequent changes in the liability should be recognised in the
Statement of Profit and Loss as they occur.

Note: This applies under both the cost model and the revaluation
model.

Accounting for Compensation for Impairment:

Situations and Its

Accounting

De-recognition Compensation from Cost of items of PPE

Impairments of of items of PPE third parties for items restored, purchased
items of PPE retired or of PPE that were or constructed as
disposed of impaired, lost or given replacements
up

Recognised in Determined in Is included in

accordance with accordance with determining profit or Is determined in
AS 28* AS 10 (Revised) loss when it becomes accordance with AS
receivable 10 (Revised)

Illustration 16 (Gain on replacement of Insured Assets)

Entity A carried plant and machinery in its books at ` 2,00,000. These were destroyed
in a fire. The assets were insured 'New for old' and were replaced by the insurance
company with new machines that cost ` 20,00,000. The machines were acquired by
the insurance company and the company did not receive ` 20,00,000 as cash
compensation. State, how Entity A should account for the same?
Solution
Entity A should account for a loss in the Statement of Profit and Loss on de-
recognition of the carrying value of plant and machinery in accordance with AS 10
(Revised).
 5.57
ASSETS BASED ACCOUNTING STANDARDS
v
v v
Entity A should separately recognise a receivable and a gain in the income v
statement resulting from the insurance proceeds under AS 29 (Revised)* once v
receipt is virtually certain. The receivable should be measured at the fair value of
assets that will be provided by the insurer.
Retirements
Items of PPE retired from active use and held for disposal should be stated at the
lower of:
• Carrying Amount, and

• Net Realisable Value

Note: Any write-down in this regard should be recognised immediately in the

Statement of Profit and Loss.

De-recognition
The carrying amount of an item of PPE should be derecognised:
• On disposal
o By sale
o By entering into a finance lease, or
o 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 when the item is derecognised unless AS 19 on
Leases, requires otherwise on a sale and leaseback (AS 19 on Leases, applies to
disposal by a sale and leaseback.)

Where,
Gain or loss arising from de-recognition of an item of PPE
= Net disposal proceeds (if any) - Carrying Amount of the item
 5.58 ADVANCED ACCOUNTING
v
v
v
Note: Gains should not be classified as revenue, as defined in AS 9 ‘Revenue
v
Recognition’. The consideration receivable on disposal of an item of property,
plant and equipment is recognised in accordance with the principles enunciated
in AS 9.

Exception
An enterprise that in the course of its ordinary activities, routinely sells items of
PPE that it had held for rental to others should transfer such assets to inventories
at their carrying amount when they cease to be rented and become held for sale.

The proceeds from the sale of such assets should be recognised in revenue in
accordance with AS 9 on Revenue Recognition.
Determining the date of disposal of an item

An enterprise applies the criteria given in AS 9 for recognising revenue from the
sale of goods.
Disclosure

Disclosures

General Additional Disclosures related to Voluntary

Revalued Assets disclosures

General Disclosures
The financial statements should disclose, for each class of PPE:
(a) The measurement bases (i.e., cost model or revaluation model) used for
determining the gross carrying amount;
(b) The depreciation methods used;
(c) The useful lives or the depreciation rates used.
In case the useful lives or the depreciation rates used are different from
those specified in the statute governing the enterprise, it should make a
specific mention of that fact;
(d) The gross carrying amount and the accumulated depreciation (aggregated
with accumulated impairment losses) at the beginning and end of the
period; and
 5.59
ASSETS BASED ACCOUNTING STANDARDS
v
v v
(e) v
A reconciliation of the carrying amount at the beginning and end of the
period showing: v

(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) net exchange differences arising on the translation of the financial
statements of a non-integral foreign operation in accordance with
AS 11
(ix) other changes
Additional Disclosures
The financial statements should also disclose:
(a) The existence and amounts of restrictions on title, and property, plant and
equipment pledged as security for liabilities;
(b) The amount of expenditure recognised in the carrying amount of an item of
property, plant and equipment in the course of its construction;
(c) The amount of contractual commitments for the acquisition of property,
plant and equipment;
(d) 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
(e) The amount of assets retired from active use and held for disposal.
 5.60 ADVANCED ACCOUNTING
v
v
v related to Revalued Assets
Disclosures
v
If items of property, plant and equipment are stated at revalued amounts, the
following should be disclosed:
(a) The effective date of the revaluation;
(b) Whether an independent valuer was involved;

(c) The methods and significant assumptions applied in estimating fair values
of the items;
(d) 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

(e) The revaluation surplus, indicating the change for the period and any
restrictions on the distribution of the balance to shareholders.
(f) Disclosure of the methods adopted and the estimated useful lives or
depreciation rates.
(g) Disclosures as per AS 5, applicable if any.
(h) Information on impaired PPE.
Voluntary disclosures:
An enterprise is encouraged to disclose the following:
(a) the carrying amount of temporarily idle property, plant and equipment;

(b) the gross carrying amount of any fully depreciated property, plant and
equipment that is still in use;
(c) for each revalued class of property, plant and equipment, the carrying
amount that would have been recognised had the assets been carried under
the cost model;
(d) the carrying amount of property, plant and equipment retired from active
use and not held for disposal.

Reference: The students are advised to refer the full text of AS 10 (Revised)
“Property, Plant and Equipment” (2016).
 5.61
ASSETS BASED ACCOUNTING STANDARDS
v
v v
v
TEST YOUR KNOWLEDGE v
MCQ
1. As per AS 10 (Revised) ‘Property, plant and equipment’, which of the following
costs is not included in the carrying amount of an item of PPE
(a) Costs of site preparation
(b) Costs of relocating
(c) Installation and assembly costs.
(d) initial delivery and handling costs
2. As per AS 10 (Revised) ‘Property, Plant and Equipment’, an enterprise holding
investment properties should value Investment property
(a) as per fair value
(b) under discounted cash flow model.

(c) under cost model

(d) under cash flow model
3. A plot of land with carrying amount of ` 1,00,000 was revalued to ` 1,50,000
at the end of Year 2. Subsequently, due to drop in market values, the land was
determined to have a fair value of ` 1,30,000 at the end of Year 4. Assuming
that the entity adopts Revaluation Model, what would be the accounting
treatment of Revaluation?
(a) Initial upward valuation of ` 50,000 credited to Revaluation Reserve.
Subsequent downward revaluation of ` 20,000 debited to P/L.

(b) Initial upward valuation of ` 50,000 credited to P/L. Subsequent

downward revaluation of ` 20,000 debited to P/L.
(c) Initial upward valuation of ` 50,000 credited to Revaluation Reserve.
Subsequent downward revaluation of ` 20,000 debited to Revaluation
Reserve.
(d) Initial upward valuation of ` 50,000 debited to P/L. Subsequent
downward revaluation of ` 20,000 credited to P/L.
 5.62 ADVANCED ACCOUNTING
v
v
v
v
4. A plot of land with carrying amount of ` 1,00,000 was revalued to ` 90,000 at
the end of Year 2. Subsequently, due to increase in market values, the land
was determined to have a fair value of ` 1,05,000 at the end of Year 4.
Assuming that the entity adopts Revaluation Model, what would be the
accounting treatment of Revaluation?
(a) Initial downward valuation of ` 10,000 debited to Revaluation Reserve.
Subsequent upward revaluation of ` 15,000 credited to P/L.

(b) Initial downward valuation of ` 10,000 debited to P/L. Subsequent

upward revaluation of ` 15,000 credited to P/L.
(c) Initial downward valuation of ` 10,000 debited to P/L. Subsequent
upward revaluation of ` 10,000 credited to P/L and ` 5,000 credited to
Revaluation Reserve.
(c) Initial downward valuation of ` 10,000 credited to P/L. Subsequent
upward revaluation of ` 10,000 debited to P/L and ` 5,000 debited to
Revaluation Reserve.

5. On sale of an asset which was revalued upwards, what would be the

treatment of Revaluation Reserve?
(a) The Revaluation Reserve is credited to P/L since the profit on sale of
such asset is now realized.
(b) The Revaluation Reserve is credited to Retained Earnings as a
movement in reserves without impacting the P/L.

(c) No change in Revaluation Reserve since profit on sale of such asset is

already impacting the P/L.
(d) The Revaluation Reserve is reduced from the asset value to compute
profit or loss.
6. A machinery was purchased having an invoice price ` 1,18,000 (including GST
` 18,000) on 1 April 20X1. The GST amount is available as input tax credit.
The rate of depreciation is 10% on SLM basis. The depreciation for 20X2-X3
would be
 5.63
ASSETS BASED ACCOUNTING STANDARDS
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(a) ` 10,000. v
v
(b) ` 11,800.
(c) ` 9,000.
(d) ` 10,500.
Theory Questions
7. A company changed its method of depreciation from SLM to WDV. How
should the change be recognised?
8. A company has debited the Building Account with the Cost of the Land on
which the building stands and has provided depreciation on such total cost.
Comment on the accounting treatment.
9. An entity is setting up a manufacturing plant. Construction of the plant is
completed in August and the plant is ready for commercial production in
November. However, the entity commences production in March. When
should be company start charging depreciation.
10. Which factors should be considered by a company while determining useful
life?
11. An entity gave the following Note in its Financial Statements:
‘The company chooses not to charge depreciation on Property, Plant and
Equipment on account of:
(a) Annual Maintenance Contracts being expensed thereby ensuring timely
repairs of Plant and Machinery.
(b) Depreciation being a non-cash expense has no impact on cash flows.
Accordingly, it is not necessary to depreciate an asset when repairs and
maintenance charges are expensed in the Statement of Profit and Loss.
(c) The values of certain assets like Property increase with passage of time,
and hence charging depreciation does not make sense.

(d) At the end of the useful life, the asset is ultimately sold, and since the
asset is at cost due to no depreciation, exact profit or loss on sale of the
asset is stated.’
 5.64 ADVANCED ACCOUNTING
v
v
v
You are required to state the appropriateness of the above accounting policy
v
in line with the relevant Accounting Standards.
Practical Questions
12. With reference to AS-10 Revised, classify the items under the following heads:
HEADS

(i) Purchase Price of Property, plant and Equipment (PPE)

(ii) Directly attributable cost of PPE or
(iii) Cost not included in determining the carrying amount of an item of
PPE.
ITEMS
(1) Import duties and non-refundable purchase taxes.

(2) Initial delivery and handling costs.

(3) Initial operating losses, such as those incurred while demand for
the output of an item builds up.
(4) Costs incurred while an item capable of operating in the manner
intended by management has yet to be brought into use or is
operated at less than full capacity.
(5) Trade discounts and rebates.
(6) Costs of relocating or reorganizing part or all of the operations of
an enterprise.

(7) Installation and assembly costs.

(8) Administration and other general overhead costs.
13. ABC 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 ` 25,00,000

taxes)

2. Initial delivery and handling costs ` 2,00,000

 5.65
ASSETS BASED ACCOUNTING STANDARDS
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v
3. Cost of site preparation ` 6,00,000
v
4. Consultants used for advice on the acquisition of ` 7,00,000
the plant

5. Interest charges paid to supplier of plant for ` 2,00,000

deferred credit

6. Estimated dismantling costs to be incurred after 7 ` 3,00,000

years

7. Operating losses before commercial production ` 4,00,000

Please advise ABC Ltd. on the costs that can be capitalised in
accordance with AS 10 (Revised).
14. Arka Ltd. purchased machinery for ` 3,000 lakhs. Depreciation was charged at
10% on SLM basis for a useful life of 10 years. At the end of Year 4, the
machinery was revalued to ` 2,700 lakhs and the same was adopted. What will
be the carrying amount of the asset at the end of Year 5 and Year 6? Assume no
change in the useful life.
15. Skanda Ltd. acquired a machinery for ` 2,50,00,000 five years ago.
Depreciation was charged at 10% p.a. on SLM basis, useful life being 10 years.
At the beginning of Year 3, the machinery was revalued to
` 3,00,00,000 with the surplus on revaluation being credited to Revaluation
Reserve. Depreciation was provided on the revalued amount over the balance
useful life of 8 years. The machinery was sold in the current year for `
1,12,50,000. Give the accounting treatment for the above in the Company’s
accounts. What will be the treatment if the machinery fetched only
` 42,50,000 now?
16. Akshar Ltd. installed a new Plant (not a qualifying asset), at its production
facility, and incurred the following costs:
▪ Cost of the Plant (as per supplier’s invoice): ` 30,00,000

▪ Initial delivery and handling costs: ` 1,00,000

▪ Cost of site preparation: ` 2,00,000
▪ Consultant fee for advice on acquisition of Plant: ` 50,000
 5.66 ADVANCED ACCOUNTING
v
v
▪ v Interest charges paid to supplier against deferred credit: ` 1,00,000
v
▪ Estimate of Dismantling and Site Restoration costs: ` 50,000 after 10
years (Present Value is ` 30,000)
▪ Operating losses before commercial production: ` 40,000
The company identified motors installed in the Plant as a separate
component and a cost of ` 5,00,000 (Purchase Price) and other costs were
allocated to them proportionately. The company estimates the useful life of
the Plant and those of the Motors as 10 years and 6 years respectively and
SLM method of Depreciation is used.
At the end of Year 4, the company replaces the Motors installed in the Plant
at a cost of ` 6,00,000 and estimated the useful life of new motors to be 5
years. Also, the company revalued its entire class of Fixed Assets at the end of
Year 4. The revalued amount of Plant as a whole is ` 25,00,000. At the end of
Year 8, the company decides to retire the Plant from active use and also
disposed the Plant as a whole for ` 6,00,000.
There is no change in the Dismantling and Site Restoration liability during the
period of use. You are required to explain how the above transaction would be
accounted in accordance with AS 10.
17. Bharat Infrastructure Ltd. acquired a heavy machinery at a cost of ` 1,000
lakhs, the breakdown of its components is not provided. The estimated useful
life of the machinery is 10 years. At the end of Year 6, the turbine, which is a
major component of the machinery, needed replacement, as further usage
and maintenance was uneconomical. The remainder of the machine is in
good condition and is expected to last for the remaining 4 years. The cost of
the new turbine is ` 450 lakhs. Give the accounting treatment for the new
turbine, assuming SLM Depreciation and a discount rate of 8%.
18. Preet Ltd. intends to set up a steel plant, for which it has acquired a
dilapidated factor having an area of 5,000 acres at a cost of ₹ 60,000 per
acre. Preet Ltd. has incurred ` 1.10 crores on demolishing the old Factory
Building thereon. A sum of ` 63,00,000 (including 5% GST thereon) was
realized from the sale of material salvaged from the site. Preet Ltd. incurred
Stamp Duty and Registration Charges of 7% of land value, paid l egal and
consultancy charges ` 8,00,000 for land acquisition and incurred ` 1,25,000
on title guarantee insurance. Compute the value of the land acquired.
 5.67
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ANSWERS/SOLUTIONS v
MCQs

1. (b) 2. (c) 3. (c) 4. (c) 5. (b) 6. (a)

Theory Questions
7. As per AS 10, Property, Plant and Equipment, the depreciation method
applied to an asset should be reviewed at least at each financial year-end
and, 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.
Accordingly, the change in method of depreciation should be accounting
for as a change in accounting estimate, prospectively.
8. As per AS 10, Property, Plant and Equipment, 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. Further, Land
and buildings are separable assets and are accounted for separately, even
when they are acquired together. With some exceptions, such as quarries
and sites used for landfill, land has an unlimited useful life and therefore is
not depreciated. Buildings have a limited useful life and therefore are
depreciable assets.

In the given case, land should not be depreciated unless it has a limited
useful life. Accordingly, it is incorrect to debit the cost of land to the
Building Account and provide depreciation on the aggregate cost.

9. As per AS 10, Property, Plant and Equipment, depreciation of an asset

begins when it is available for use, i.e., when it is in the location and
condition necessary for it to be capable of operating in the manner
intended by management.
In the given case, since the plant is ready for commercial production in
November, depreciation shall commence from November. The date of
 5.68 ADVANCED ACCOUNTING
v
v
v
commencement of commercial production is irrelevant for charging
v
depreciation.

10. All the following factors are considered in determining the useful life of an
asset:
(a) expected usage of the asset. Usage is assessed by reference to the
expected capacity or physical output of the asset.
(b) expected physical wear and tear, which depends on operational
factors such as the number of shifts for which the asset is to be used
and the repair and maintenance programme, and the care and
maintenance of the asset while idle.
(c) technical or commercial obsolescence arising from changes or
improvements in production, or from a change in the market demand
for the product or service output of the asset. Expected future
reductions in the selling price of an item that was produced using an
asset could indicate the expectation of technical or commercial
obsolescence of the asset, which, in turn, might reflect a reduction of
the future economic benefits embodied in the asset.
(d) legal or similar limits on the use of the asset, such as the expiry dates
of related leases.
11. Depreciation refers to writing off the value of the asset over its useful life.
Such write-off is necessitated on account of normal wear-and-tear, usage,
or obsolescence. Since items of Property, Plant and Equipment are generally
used in generating revenue, the pro-rated write-off in value of such item
should be recorded in the books against the income earned by such an
asset.
Providing depreciation is mandatory, in spite of the fact that repairs are
expensed in the Statement of Profit and Loss, or the value of the Property is
appreciating. Depreciation is a systematic allocation of cost of the asset
against the income generated from the continued use of the asset. Further,
the Companies Act, 2013 mandates depreciation to be charged in order to
determine the correct profits. Thus, not charging depreciation would result
in non-compliance with the Companies Act provisions as well.
 5.69
ASSETS BASED ACCOUNTING STANDARDS
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v v
v
The argument laid down by the company and the reasons for the same
being invalid are discussed below. v

(a) Annual Maintenance Contracts being expensed thereby ensuring

timely repairs of Plant and Machinery:
The fact that the company enters into Annual Maintenance Contracts
for timely repairs can be regarded as a running cost. Such expense is
incurred in order to ensure that the machine continues to run as
intended. Thus, it implies that because the machine is being utilized, it
will need regular repairs. In other words, continuous use is resulting in
normal wear-and-tear which is the reason why depreciation should be
charged by the company. By stating that the company incurs Annual
Maintenance Expenses, the company is recording only the
’maintenance expenses’, but not the wear-and-tear requiring the
maintenance in the first place. Hence, this argument put forth by the
company is not valid.
(b) Depreciation being a non-cash expense has no impact on cash flows.
Accordingly, it is not necessary to depreciate an asset when repairs
and maintenance charges are expensed in the Statement of Profit and
Loss.
When viewed from the prism of depreciation alone, it appears that the
fact that depreciation is a non-cash item is correct. However, it must
be noted that at the time of procurement of the asset, the company
would have paid cash. Depreciation is after all writing off this amount
over the life of the asset. Hence the argument that depreciation is a
non-cash item is not valid. Depreciation is writing off the cost of the
asset (which was already paid for) over the useful life of the asset, and
hence is mandatory.
(c) The values of certain assets like Property increase with passage of
time, and hence charging depreciation does not make sense.

Certain assets like immovable property do increase in value with the

passage of time. However, such assets are ‘used for the purposes of
business’ and are not ‘held for sale’ or held as investment property.
Accordingly, since the asset is being used for carrying on business,
 5.70 ADVANCED ACCOUNTING
v
v
v providing depreciation will give a true and fair view of the results of
v
the company, and hence the argument that the value of the property
appreciates is not valid.
If the company wants to show the fair market value of the PPE, then it
has the option to apply Revaluation model. However, depreciation is
mandatory to be charged in Revaluation model also.
(d) At the end of the useful life, the asset is ultimately sold, and since the
asset is at cost due to no depreciation, exact profit or loss on sale of
the asset is stated.’
The value of any asset, after usage, will reduce. Accordingly, the
argument that the ‘exact profit or loss on sale of the asset’ will be
obtained is incorrect. Due to usage of the asset, the value of the asset
would be lower than the cost. Charging depreciation would seek to
bring the book value approximating to such reduced value. Thereafter,
on sale of the asset, the true profit or loss would be available.
Accordingly, this argument is also invalid.
It may be pertinent to note that Accounting Standard 1, Disclosure of
Accounting Policies states that Disclosure of accounting policies or of
changes therein cannot remedy a wrong or inappropriate treatment of the
item in the accounts. In other words, the company cannot be absolved of
the fact that it has not complied with the relevant accounting standards
merely by giving a disclosure of incorrect policies or practices being
followed.

Thus, the company’s stand of disclosing the incorrect policy as a remedy is

not correct. The company is suggested to charge depreciation on a
systematic basis over the useful life of the asset thereby complying with the
Accounting Standards.
Practical Questions
12. Heads
(i) Purchase price of PPE
(iii) Directly attributable cost of PPE
 5.71
ASSETS BASED ACCOUNTING STANDARDS
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(iii) v
Cost not included in determining the carrying amount of an item of
PPE v

Items Classified
under Head
1 Import duties and non-refundable purchase taxes (i)
2 Initial delivery and handling costs (ii)
3 Initial operating losses, such as those incurred while (iii)
demand for the output of an item builds up
4 Costs incurred while an item capable of operating in (iii)
the manner intended by management has yet to be
brought into use or is operated at less than full
capacity.
5 Trade discounts and rebates (deducted for computing (i)
purchase price)
6 Costs of relocating or reorganizing part or all of the (iii)
operations of an enterprise.
7 Installation and assembly costs (ii)
8 Administration and other general overhead costs (iii)

13. According to AS 10 (Revised), these costs can be capitalised:

1. Cost of the plant ` 25,00,000

2. Initial delivery and handling costs ` 2,00,000
3. Cost of site preparation ` 6,00,000
4. Consultants’ fees ` 7,00,000
5. Estimated dismantling costs to be incurred after 7 years ` 3,00,000
` 43,00,000

Note: Interest charges paid on “Deferred credit terms” to the supplier of the
plant (not a qualifying asset) of ` 2,00,000 and operating losses before
commercial production amounting to ` 4,00,000 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.
 5.72 ADVANCED ACCOUNTING
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14. v
v
Particulars ` in lakhs

Original Cost of the Asset 3,000.00

Less: Depreciation for 4 years (` 3,000 lakhs x 10% x 4 years) (1,200.00)

Book Value at the end of Year 4 1,800.00

Add: Revaluation Surplus (balancing figure) 900.00

Revalued Amount as given (= revised depreciable value) 2,700.00

Less: Depreciation for Year 5 (` 2,700 lakhs ÷ 6 years) 450.00

Carrying Amount at the end of Year 5 2,250.00

Less: Depreciation for Year 6 (` 2,700 lakhs ÷ 6 years) 450.00

Carrying Amount at the end of Year 6 1,800.00

15.

Particulars `

Original Cost of the Asset 2,50,00,000

Less: Depreciation for 2 years (` 2,50,00,000 x 10% x 2 50,00,000

years)

Book Value at the beginning of Year 3 2,00,00,000

Add: Revaluation Surplus (balancing figure) 1,00,00,000

Revalued Amount as given (= revised depreciable value) 3,00,00,000

Less: Depreciation for Years 3-5 (` 3,00,00,000 ÷ 8 yrs x 3 1,12,50,000

yrs)

Carrying Amount at the end of Year 5 1,87,50,000

 5.73
ASSETS BASED ACCOUNTING STANDARDS
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v
The treatment of Gain / Loss on Disposal / Revaluation is as below: v
Particulars Disposal Proceeds = Disposal Proceeds =
` 1,12,50,000 ` 42,50,000

Book Value Less

` 1,87,50,000 – ` ` 1,87,50,000 –
Disposal Proceeds
1,12,50,000 = ` 75,00,000 ` 42,50,000 =
= Loss recognized
(Loss) ` 1,45,00,000 (Loss)
in Profit or Loss

Revaluation
Surplus directly
` 1,00,00,000 ` 1,00,00,000
transferred to
Retained Earnings

16.
1. Cost at Initial Recognition:

Particulars `

Cost of the Plant (as per Invoice) 30,00,000

Initial Delivery and Handling Costs 1,00,000

Cost of Site Preparation 2,00,000

Consultants’ Fees 50,000

Estimated Dismantling and Site Restoration Costs 30,000

Total Cost of Plant including Motors 33,80,000

Less: Cost of Motors identified as a separate component 5,63,333

(1/6)*

Cost of the Plant (excluding Motors – balance 5/6) 28,16,667

* Purchase price of Motors = ` 5,00,000 out of ` 30,00,000 i.e., 1/6 of value

of Plant
 5.74 ADVANCED ACCOUNTING
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v
Note: Since the asset is not a qualifying asset, payment of interest to the
v
supplier is not capitalized. Further, operating losses of ` 40,000 incurred
before commercial production is not a directly attributable cost, and hence
excluded from cost of asset. These costs are expensed to the P/L as and
when they are incurred.

2. Recognition of Motors Replacement

Particulars `

Cost of Motors determined above 5,63,333

Less: Depreciation for 4 years (as per SLM) 3,75,555

5,63,333 ÷ 6 years x 4 years

Carrying Amount of Motors at the end of Year 4 1,87,778

Accounting: The company should derecognize the existing Carrying

Amount of Motors replaced of ` 1,87,778. Further, the acquisition cost of
new motors of ` 6,00,000 would be capitalized as a separate component.
This amount will be depreciated over the next 5 years at ` 6,00,000 ÷ 5
years = ` 1,20,000 p.a.
3. Revaluation

Particulars `
Cost of the Plant at initial recognition [from (1) above] 28,16,667
Less: SLM Depreciation for 4 years: ` 28,16,667 ÷ 10 years x 11,26,667
4 years
Carrying Amount of Plant at the end of Year 4 16,90,000
Revalued Amount of Plant (Excluding Motors, since the 19,00,000
same is treated as a separate component: ` 25,00,000 –
` 6,00,000)
Therefore, Gain on Revaluation credited to Revaluation 2,10,000
Reserve
Revised Depreciation Charge p.a.: 19,00,000 ÷ 6 years 3,16,667
 5.75
ASSETS BASED ACCOUNTING STANDARDS
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4. Derecognition v
v
Particulars Motors Plant
(excluding
Motors)
Cost / Revalued Amount at end of Year 4 6,00,000 19,00,000
Less: Depreciation for Years 5-8 1,20,000 x 4 3,16,667 x 4
= 4,80,000 =12,66,668
Carrying Amount before Disposal / De- 1,20,000 6,33,332
recognition
Less: Disposal Proceeds ` 6,00,000 95,575 5,04,425
allocated in ratio of carrying amount
Loss to be written off to P/L 24,425 1,28,907

Notes:
(a) The Revaluation Surplus of ` 2,10,000 would be transferred directly to
Retained Earnings.
(b) The allocation of disposal proceeds of ` 6,00,000 for the plant as
whole is apportioned based on carrying amount of motors and plant
(excluding motors)

Alternatively, it may be apportioned as 1/6 towards motors and 5/6 plant

(excluding motors) based on the reasoning that the initially, motors
amounted to 1/6 of the entire plant. This approach may not be preferable
because there has been a revaluation of the plant (excluding motors) and a
disposal and subsequent acquisition of the Motor, which is not in the initial
proportion of 5/6 and 1/6 respectively.

17. As per AS 10, Property, Plant and Equipment, the derecognition of the
carrying amount of components of an item of Property, Plant and
Equipment occurs regardless of whether the cost of the previous part /
inspection was identified in the transaction in which the item was acquired
or constructed. If it is not practicable for an enterprise to determine the
carrying amount of the replaced part/ inspection, it may use the cost of the
replacement or the estimated cost of a future similar inspection as an
 5.76 ADVANCED ACCOUNTING
v
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indication of what the cost of the replaced part/ existing inspection
v
component was when the item was acquired or constructed.
In the given case, the new turbine will produce economic benefits to Bharat
Infrastructure Ltd. and the cost is measurable. Since the recognition criteria
is fulfilled, the same should be recognised as a separate item of Property,
Plant and Equipment. However, since the initial breakup of the components
is not available, the cost of the replacement of ` 450 lakhs can be used as
an indication based on the guidance given above, discounted at 8% for the
6-year period lapsed.
Thus, estimate of cost 6 years back = ` 450 lakhs ÷ 1.08 6 = ` 283.58 lakhs
Current carrying amount of turbine (to be de-recognised) = Estimated cost
` 283.58 lakhs (–) SLM depreciation at 10% (useful life 10 years) for 6 years
` 170.15 lakhs= ` 113.43 lakhs.
Hence revised carrying amount of the machinery will be as under:

Particulars ` in lakhs
Historical Cost [` 1,000 lakhs (–) SLM Depreciation at 10% 400.00
(10 year life) for 6 years]
Add: Cost of new turbine 450.00
Less: Derecognition of current carrying amount of old (113.43)
turbine
New Carrying Amount of Machinery 736.57

18.
Particulars `
Purchase Price: 5,000 acres x ` 60,000 per acre 3,000.00
Stamp Duty and Registration Charges at 7% 210.00
Legal and Consultancy Fees 8.00
Title Guarantee Insurance 1.25
Demolition Expenses (Net of Salvage Income) 50.00
[` 110 lakhs (–)` 60 lakhs (` 63 lakhs x 100/105)]
Cost of Land 3,269.25