Prof.

Subham Matolia 1

AS 10 - Property Plant and Equipment

Property Plant and Equipment (PPE) are tangible assets which are used in production of goods, rendering of services,
administrative purpose, rental purpose and which are expected to be used for more than one period.
Examples – building, machinery, dams, furniture etc.
This Accounting Standard does not cover Biological Asset and Mining Asset but includes Bearer Plant.

Bearer Plant is a plant that satisfies all 3 conditions:

a) Is used in the production and supply of agricultural produce;
b) Is expected to bear produce for more than one period; and
c) Has remote likelihood of being sold as agricultural produce, except for incidental scrap sales.

Recognition Criteria –
PPE should be recognised as financial statements as assets if both of the following conditions are satisfied –
1. Future economic benefit should flow to the entity, and
2. Its cost can be reliably measured.

Small value items: If the amount of expenditure is very small (not material) then the management may decide not to
capitalise it. It is recorded as revenue expenditure.

Measurement of Cost for initial recognition –

PPE should be initially recorded at cost. The cost of an asset includes all the cost which are incurred to bring the asset to
its present location and condition necessary for it to be capable of operating in the manner intended by the management.
Cost includes the following:
Purchase price (price agreed by parties) XXX
(+) Import duty XXX
(+) GST/Purchase tax (if credit not available) XXX
(+) Directly attributable cost XXX
(+) Provision for decommissioning, restoration and other obligation XXX
(at PV of expected amount to be settled)
(+) Borrowing cost capitalised XXX
COST of ASSET XXX
Examples of directly attributable cost –
Cost of site preparation, installation, trial run expense, initial delivery and handling cost, professional fees.

The following costs are not included in the carrying amount of an item of PPE:
 Cost of conducting business in a new location or with a new class of customer (including costs of advertising and
promotional activities and costs of staff training)
 Administrative and other general overhead costs
 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
 Initial operating losses, such as those incurred while demand for the output of an item builds up
 Cost of relocating or reorganising part or all of the operations of an enterprise.

Provision for decommissioning, restoration and other obligation – Cost incurred by an entity in respect of obligation
for dismantling, removing and restoring the site on which an item of property, plant and equipment is located are recognised
and measured in accordance with AS 29 Provisions, Contingent Liabilities and Contingent Assets.

Component Based Accounting

Whenever any PPE is recognised, then identifications of components should be made. Component represents part of PPE
having substantial value in comparison to the total cost of PPE. Components having similar depreciation method, useful life
and usage should be combined as a single component.
Upon Replacement of Components:
 Old book value of the component should be derecognized
 New cost should be capitalised with PPE
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 If old book value can’t be identified, since components were not identified initially then current cost should be discounted
to identify the cost of component to be replaced.
Major Inspection Costs are also considered as component of PPE. Such inspection should be depreciated over inspection
period. When new inspection cost is incurred, old book value should be derecognised.

PPE acquired through exchange

PPE acquired in exchange for a Non-monetary Asset or a combination of Monetary and Non-monetary Assets then the 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 received nor the asset given up is reliably measurable.
An exchange transaction has commercial substance if the risk, timing and amount of cash flow of the asset received differs
from the risk, timing and amount of cash flow of the asset transferred. If an entity is able to measure reliably the fair value
of either the asset received or the asset given up, then fair value of asset given up is used to measure the cost of the asset
received unless the fair value of asset received is more clearly evident.

Subsequent Recognition of PPE

It means the value at which PPE should appear in financial statements. It is also called carrying amount. Following points
are relevant:
1. AS 10 allows entities a choice to apply Cost Model or Revaluation Model to a class of PPE. It means two different classes
can have different policies.
2. Class means group of PPE having similar usage. Such group should be of similar nature.
3. Calculation of carrying amount under Cost Model:
Original Cost XXX
(-) Accumulated depreciation XXX
(-) Accumulated impairment loss XXX XXX
4. Calculation of carrying amount under Revaluation Model:
Fair value at the date of revaluation XXX
(-) Subsequent accumulated depreciation XXX
(-) Subsequent accumulated impairment loss XXX XXX
5. Such fair value should be calculated at regular frequency. AS doesn’t specify any specific interval for revaluation. It is
left upon the decision of management to decide the time intervals. If fair value is highly volatile frequency should be
annual. Fair value is not required to be calculated at year end. It can be calculated at any date of the year. Generally
subsequent revaluations are carried at similar dates in future.
6. Journal Entry on the date of revaluation
a. Method 1 – Gross Method
 Calculate the change in carrying amount of PPE in percentage %
 Calculate change in cost and change in accumulated depreciation required
 PPE a/c Dr.
To Accumulated Depreciation
To Revaluation Reserve
(Being fair value of PPE increased) OR
 Revaluation Reserve (if available) / Profit/Loss a/c Dr.
Accumulated Depreciation a/c Dr.
To PPE
(Being fair value of PPE reduced)
b. Method 2 – Net Method
 Cancel accumulated depreciation with PPE to the extent available
 Calculate increase/decrease in carrying amount
 Adjust the changes in PPE
 PPE a/c Dr. OR Revaluation Reserve / Profit/Loss a/c Dr.
To Revaluation Reserve To PPE
(Being fair value of PPE increased) (Being fair value of PPE reduced)
7. Whenever PPE is revalued, the depreciation to be charged in P&L is also on the revalued amount. It means charge to
P&L can be more or less due to revaluation.
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8. If any entity changes its policy from cost model to revaluation model, then such change is change in accounting policy.
But this change will be on prospective basis.

Treatment of Revaluation Gain or Loss

First time Subsequent

revaluation Revaluation

Increase in Decrease in carrying

Increase in Decrease in carrying carrying amount amount of revalued
carrying amount of revalued of revalued asset asset
amount of asset
revalued asset

Was there previous Was there previous

increase in carrying decrease in carrying
Recognise the amount of revalued amount of revalued asset
Recognise revaluation loss asset
the gain in in P&L
Revaluation
Reserve Yes No Yes No

Recognise the
Recognise the revaluation Recognise revaluation
Recognise loss to the
the gain in gain in P&L to the extent the
that it reverses the revaluation extent any
Revaluation credit balance
Reserve revaluation decrease loss in P&L
previously recognised in existing in
P&L Revaluation
reserve

Remaining Remaining
revaluation decraese to be
gain will be recognised in
trasnfered to P&L
Revaluation
Reserve

Depreciation
1. Depreciation means systematic allocation of depreciable amount over the useful of asset.
2. Depreciable Amount means amount of PPE in books, less estimated residual value. This estimated is made by
management based on current prices.
3. AS 10 does not specifies any particular method to be applied. Generally systematic allocation is obtained by SLM or
WDV or Units of Production method. It should reflect the consumption pattern of the asset. Revenue based ratio is not
correct consumption pattern.
4. Depreciation is charged based on components.
5. Depreciation is charged when the asset 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. Depreciation of an asset ceases when the asset is
derecognised or when the asset is classified as held for sale.
6. Useful life is estimated by the management based on – wear and tear of asset, technical obsolesce, expected usage of
the asset and legal limits on the use of asset. Land is not depreciated, unless it has limited useful life.
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7. Useful life, Residual value and Depreciation method should be reviewed regularly (generally on annual basis). If any
change occurs it is called Change in Accounting Estimate, hence it is adjusted prospectively.

Question 1
A Ltd. purchased on 1.4.2014 one ship for ₹50 lakhs. It requires inspection by government after every 3 years. Inspection
cost of ₹ 10 lakhs not included in above. Ship has following components:
Hull 20 lakhs Life 30 years
Engine 15 lakhs Life 10 years
Deck 10 lakhs Life 20 years
Residual 5 lakhs Life 5 years
A Ltd. incurred ₹15 lakhs on inspection on 31.3.2017. A Ltd. replaced deck with new deck for ₹17 lakhs on 31.3.2018.
Prepare ship account upto 31.3.2019.

Question 2
On April 1, 2018 XYZ Ltd. acquired a machine under following terms:
₹
List price of machine 80,00,000
Import duty 5,00,000
IGST (credit available) 4,00,000
Delivery fees 1,00,000
Electrical installation 10,00,000
Pre-production testing 4,00,000
Purchase of 5 year maintenance contract with vendor 7,00,000
Legal fees 1,00,000
General Overheads 1,00,000
Operating losses before commercial production 25,000
In addition to above information XYZ Ltd. was granted a trade discount of 10% on the list price of the machine and a
settlement discount of 5%, if payment for machine was received within 1 month of purchase. XYZ Ltd. paid for the machine
on April 20, 2018. At what cost the asset will be recognised.

Question 3
Jupiter Ltd has an item PPE with initial cost of ₹100,000. At the time of revaluation accumulated depreciation amounted to
₹55,000. The fair value of asset, by reference to transactions in similar assets, is assessed to be ₹65,000. Pass journal
entries considering Revaluation model of subsequent measurement adopted by the entity.

Question 4
B Ltd owns an asset with an original cost of ₹ 200,000. On acquisition management determined that the useful life was 10
years and the residual value will be ₹ 20,000. The asset is now 8 years old, and during this time there has been no revision
to the assessed residual value. Depreciation is provided under SLM basis.
At the end of 8th year, management has reviewed the useful and residual value and has determined that useful life can be
extended to 12 years in view of the maintenance program adopted by the entity. As a result, residual value will reduce to
₹ 10,000. How would the above changes in estimate be made by B Ltd.

Question 5
Doubtful Ltd purchased a machinery on April 1, 2015 for ₹ 200,000 and incurred ₹ 20,000 on its major repair on the same
date. The estimated life of the machine is 10 years at the end of which its residual value is expected to be ₹ 40,000.
Depreciation is provided under SLM basis.
As per practice, a valuer reviews the estimated life and useful life and residual value at the end of every accounting year:
Year end 31.3.2017 31.3.2018 31.3.2019
Estimated residual value 22,000 14,000 12,000
Remaining useful life (years) 8 5 3
The firm wants to change the method of depreciation to diminishing balance method @ 40% p.a. on and from 31.3.2019.
Show equipment account from 2015-16 to 2018-19.
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Question 6
A company writes off depreciation on its Plant and Machinery @ 25% p.a. on reducing balance. On 1.4.2018 the balance
of Plant and Machinery was ₹ 720,000. While going through the books it was found that: Current repairs of ₹ 80,000
incurred on 1.10.2016 had been capitalized; and wages of ₹ 48,000 incurred on 30.6.2015 in connection with installation
of Plant and Machinery had been treated as revenue expenditure. Necessary corrections are to be made in the accounts of
2018-19. On 30.9.2018, a part of the plant purchased on 31.12.2015 for ₹ 60,000 was sold for ₹ 36,000.
Prepare Plant and Machinery account on 31.3.2019 on the basis that company provides depreciation proportionate to the
period of time for which the asset is used.