Depreciation

Thus, the following conditions must be satisfied for an asset to be called PPE
▪ Tangible items- PPE must be tangible items. Intangible items are covered under
AS-26- Intangible Assets
▪ Held for specified purposes. Tangible items, called PPE are held for any one or
more of the following purposes
■ Production of goods
■ Supply of services
■ Administrative purposes (All business purposes other than production or
supply of goods or services or for rental for others).
Thus, PPE would include assets used for selling and distribution, finance and accounting,
personnel, and other functions of an enterprise. Items of PPE may be acquired for safety or
environmental reasons.
▪ Expected use of more than 12 months. PPE are tangible items that are expected
to be used for more than a period of 12 months.
Is a living animal/plant & is the core income
producing asset of agricultural activity
When plants are no longer used to bear produce they might be sold as
firewood.

Mango Tree is a bearer tree & covered under AS-10. Mango grown in mango trees are not covered by AS-10
Trees grown for use as lumber are not bearer plants
Trees that are cultivated for both their fruit & lumber are not bearer plants
Crops such as wheat & maize are not bearer plants as the plant of wheat is cut down and sold as scrap
● Gross Carrying Amount: is the cost or other amounts substituted for cost in the books of accounts

● Carrying Amount: the amount at which asset is recognised after deducting any accumulated depreciation
and accumulated impairment losses

● Impairment loss: Amount by which the carrying amount exceeds its recoverable amount. For example, if a
manufacturing facility becomes obsolete due to technological advancements, its carrying amount might
exceed its recoverable amount, leading to an impairment loss.

● Recoverable Amount: the higher of assets net selling price and its value in use
Salient Features of AS-10

1. Depreciation is charged on PPE that

▪ Are held for use in the production or supply of goods or services or rental or other
administrative purposes
▪ Are expected to be used for more than a period of 12 months.
PPE are not held for sale in the ordinary course of business.

2. Depreciable amount should be allocated on a systematic basis over the useful life.
▪ Depreciable amount- Cost of the asset or other amounts substituted for cost less
its residual value
▪ Residual Value- the estimated net amount expected to be realised at the end of
the useful life of the asset
▪ Useful life is either
o The period over which an asset is expected to be available for use by an enterprise
o The number of production or similar units expected to be obtained from the asset.
3. The residual value and the useful life of the asset should be reviewed atleast at each financial year-end. If the
expectation differs from the previous estimate, the changes should be accounted for as a change in an accounting
estimate with AS-5- Net Profit or Loss for the period, prior period items, and changes in accounting policies.

4. Depreciation method used should reflect the pattern in which the future economic benefits of the asset are
expected to be consumed by the enterprise.

5. The depreciable method applied to an asset should be reviewed atleast at each financial year end and if there
has been a significant change in the expected pattern of consumption of the future economic benefits of 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 with AS-5- Net Profit or Loss for
the period, prior period items, and changes in accounting policies.
● The depreciation charge should be adjusted for current and future periods.
6. 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.

7. The depreciation charge for each period should be recognized in the statement of Profit & Loss unless it is
included in the carrying amount of another asset
E.g. the depreciation of a manufacturing plant is included in the cost of conversion of inventory

The depreciation charge for each period is usually recognised in the statement of Profit & Loss, whether the
enterprise earns profits or incurs losses to match cost with revenue.

8. 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.
9. Depreciation of an asset ceases from the
○ Date the asset is retired from active use and is held for disposal.
○ The date the asset is derecognised
Whichever date is earlier.

10. Land & building are separable assets and are accounted for separately even when they are acquired together.
Land has unlimited life and therefore is not depreciated. Building has limited useful life and therefore are
depreciated.

11. Depreciation arises from use of asset, passage of time and obsolescence.

12. The major spare parts which are required to be capitalised should be depreciated over their useful life.
13. An enterprise should choose either the Cost Model or Revaluation Model as its accounting policy and should
apply that policy to the entire class of PPE.

● Cost Model: After recognition of as an asset, an item of PPE should be carried at its cost less any accumulated
depreciation less any accumulated impairment losses.

● Revaluation model: After recognition of as an asset, an item of PPE whose fair value can be measured
reliably should be carried at a revalued amount, being its fair value at the date of revaluation less only
subsequent accumulated depreciation and subsequent accumulated impairment losses.
● Under the revaluation model, after the initial recognition, a company can choose to revalue its PPE to its fair
value.
○ Fair value is the amount that the asset could be exchanged for between
knowledgeable and willing parties in an arm's length transaction.
● If an item of PPE is revalued, its carrying amount is adjusted to the fair value at the date of revaluation. This
means that the asset's value on the balance sheet is adjusted to reflect its current market or economic value.
● After revaluation, depreciation is charged on the revalued amount, not on the original cost. This is to ensure
that the asset's carrying amount continues to reflect its current fair value
● If there is evidence of an impairment of a revalued asset (i.e., if the asset's recoverable amount falls below its
carrying amount), impairment losses are recognized. These impairment losses are deducted from the
revalued amount to adjust the carrying amount of the asset.

● The revaluation model allows companies to periodically adjust the carrying amount of their PPE to reflect
changes in fair value. This ensures that the asset is reported on the balance sheet at a value that is closer to
its current market or economic worth.
● An increase in the carrying amount of an asset arising on revaluation should be credited directly to owner’s
interest under the heading of revaluation surplus. However, the increase should be recognised in the
statement of P/L to the extent that it reverses a revaluation decrease of the same asset previously
recognised in the statement of P/L.

● A decrease in the carrying amount of an asset arising on revaluation should be charged to statement of P/L.
However, the decrease should be debited directly to owner’s interest under the heading of revaluation
surplus to the extent of any credit balance existing in the revaluation surplus in respect of that asset.

● The revaluation surplus included in owner’s interest is transferred in respect of an item of PPE may be
transferred to revenue reserves when the asset is derecognised. This may involve transferring the whole of
the surplus when the asset is retired or disposed.

● Some of the surplus may be transferred to revenue reserve if the asset is being used by the enterprise. In
such a case, the amount of surplus transferred would be difference between depreciation based on
revaluated carrying amount of the asset and depreciation based on its original cost
E.g. Cost of Machine –Rs. 1,00,000
Residual value- Nil
Useful Life- 10 years
The entity charges depreciation on SLM.
The machine was revalued to Rs. 50,000 in the beginning of 9th year.

Original Cost 1,00,000

Less: Total Dep up to 8 years 80,000
------------
Carrying amount at the beg of 9th year 20,000
Revised Carrying amount 50,000
Revaluation Surplus 30,000

Dep on the basis of the revised carrying amount (50,000-0/2) 25,000

Dep on the basis of original cost 10,000
Difference between the dep amounts 15,000

Rs. 30,000 credited to Revaluation surplus at the beginning of 9th year

Rs. 15,000 will be transferred from revaluation surplus to revenue reserve at the end of 9th year

Rs. 25,000 will be charged as dep for the 9th year

Recognition of an item of PPE as an asset:
● An item of PPE should be recognised as an asset if and only if
○ It is probable that the future economic benefit associated with the item will
flow to the enterprise.
○ The cost of the item can be measured reliably.
e.g. a plant & machinery is purchased for Rs. 50 Lakhs. It satisfies recognition criteria as future economic benefits
will flow to the enterprise in the form of goods to be produced using the plant & machinery. The price of the plant
& machinery can be measured reliably from the purchase price.

Spare Parts
● Spare parts consumed are recognised as direct expenses in statement of P/L
● Major spare parts are treated as PPE if they are expected to be used for more than one accounting period.
● A major spare part which can be exclusively used with an item of PPE should be accounted as a PPE
e.g. a machinery is purchased for Rs. 5,00,000 together with a major spare part for Rs. 50,000 not readily
available in the market and another spare part worth Rs. 1,00,000 which can be used only on this machinery and
not on any other machinery. Machinery will be initially recognised at Rs. 6,50,000 (5,00,000+50,000+1,00,000) as
PPE