What Is AS 10?
Accounting Standard 10 (AS 10), titled "Property, Plant and Equipment," was issued by the ICAI and replaced the earlier AS 10 (Accounting for Fixed Assets) and AS 6 (Depreciation Accounting). The revised standard prescribes the accounting treatment for property, plant and equipment (PPE) — the principal issues being the timing of recognition, the determination of carrying amounts, and the depreciation charges and impairment losses to be recognised.
Scope
AS 10 applies to all property, plant and equipment except:
- Biological assets related to agricultural activity (other than bearer plants)
- Wasting assets including mineral rights, expenditure on exploration and extraction of minerals and similar non-regenerative resources
- Assets covered by other standards (e.g., AS 19 for leased assets)
Key Definitions
| Term | Definition |
|---|---|
| Property, Plant and Equipment | Tangible items held for use in production, supply of goods/services, rental, or administration; expected to be used for more than one period |
| Cost | The amount of cash or cash equivalents paid, or the fair value of other consideration given, to acquire an asset at the time of its acquisition or construction |
| Carrying Amount | The amount at which an asset is recognised in the balance sheet after deducting accumulated depreciation and accumulated impairment losses |
| Depreciation | The systematic allocation of the depreciable amount of an asset over its useful life |
| Useful Life | The period over which an asset is expected to be available for use, or the number of production units expected from it |
| Residual Value | The estimated amount that an entity would currently obtain from disposal of the asset, after deducting estimated disposal costs, if the asset were at the end of its useful life |
Recognition Criteria
An item of PPE should be recognised as an asset when:
- It is probable that future economic benefits associated with the item will flow to the enterprise
- The cost of the item can be measured reliably
Spare parts, stand-by equipment and servicing equipment are recognised as PPE when they meet the definition — otherwise, they are classified as inventory.
Measurement at Cost
An item of PPE that qualifies for recognition is measured at its cost. The cost comprises:
Elements of Cost
- Purchase price — including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates
- Directly attributable costs to bring the asset to the location and condition necessary for it to operate as intended:
- Cost of site preparation
- Initial delivery and handling costs
- Installation and assembly costs
- Cost of testing (net of proceeds from sale of items produced during testing)
- Professional fees (architects, engineers)
- Initial estimate of decommissioning/restoration costs — if the enterprise has an obligation
Costs NOT Included
- Costs of opening a new facility
- Costs of introducing a new product or service (including advertising and promotion)
- Costs of conducting business in a new location or with a new class of customer
- Administration and other general overhead costs
- Abnormal costs (abnormal waste, idle capacity costs)
Subsequent Expenditure
Subsequent expenditure on an item of PPE should be recognised as an asset only when:
- It is probable that future economic benefits will flow to the enterprise, and
- The cost can be measured reliably
Day-to-day servicing (repairs and maintenance) costs are recognised in the P&L as incurred. Major inspections or overhauls that extend the useful life or add future economic benefits are capitalised.
Depreciation Methods
The depreciable amount (cost minus residual value) should be allocated on a systematic basis over the useful life. AS 10 allows several methods:
| Parameter | Straight Line Method (SLM) | Written Down Value (WDV) |
|---|---|---|
| Formula | (Cost - Residual Value) / Useful Life | Rate % x Written Down Value (opening balance) |
| Annual Charge | Constant (same amount every year) | Decreasing (higher in early years) |
| Carrying Amount | Decreases linearly | Decreases exponentially |
| Suitability | Assets with uniform utility (buildings, furniture) | Assets with higher utility in early years (vehicles, technology) |
| Tax Treatment | Used for books (Companies Act) | Used for income tax computation |
Useful Life under Companies Act
For companies, the useful life of assets is prescribed in Part C of Schedule II of the Companies Act, 2013. If the management estimates a useful life different from Schedule II, the reasons must be disclosed along with technical justification.
Derecognition
An item of PPE is derecognised (removed from the balance sheet) on disposal or when no future economic benefits are expected from its use or disposal. The gain or loss on derecognition is included in the P&L and is calculated as the difference between the net disposal proceeds and the carrying amount.
Disclosure Requirements
The financial statements should disclose for each class of PPE:
- Gross carrying amount and accumulated depreciation at the beginning and end of the period
- Additions, disposals, acquisitions through business combinations
- Depreciation for the period and the depreciation methods used
- Useful lives or depreciation rates used
- Existence and amounts of restrictions on title, and PPE pledged as security for liabilities
- Expenditure on PPE in the course of construction
- Contractual commitments for acquisition of PPE
Conclusion
AS 10 provides a comprehensive framework for accounting for property, plant and equipment — from initial recognition through depreciation to eventual derecognition. Understanding the elements of cost, the appropriate depreciation method, and the treatment of subsequent expenditure is essential for accurate financial reporting and compliance with the Companies Act 2013.
At TaxClue, our team of qualified CAs assists businesses with PPE accounting, depreciation calculations, and compliance with accounting standards. Contact us for expert assistance.