Accounting Standard-10

fixed assets/cost of
acquisition/Property, Plant and
Equipment
Fixed assets refer to long-term tangible assets that are
used in the operations of a business. They provide long-
term financial benefits, have a useful life of more than
one year, and are classified as property, plant, and
equipment (PP&E) on the balance sheet.

Fixed Asset is an asset:

held with the intention of being used for the purpose of

producing or providing goods or services and

is not held for sale in the normal course of business.

(It is expected to be used for more than one accounting

period.)
like land ,furniture,vehicles Land,Machinery,Buildings and
facilities,Vehicles (company cars, trucks, forklifts,
etc.)Furniture,Computer equipment,Tools
Key Characteristics of a Fixed Asset
1. They have a useful life of more than one year
Fixed assets are non-current assets that have a useful life of more than one year
and appear on a company’s balance sheet as property, plant, and equipment
(PP&E).
2. They can be depreciated
With the exception of land, fixed assets are depreciated to reflect the wear and
tear of using the fixed asset.
3. They are used in business operations and provide a long-term financial
benefit
Fixed assets are used by the company to produce goods and services and generate
revenue. They are not sold to customers or held for investment purposes.
4. They are illiquid
Fixed assets are non-current assets on a company’s balance sheet and cannot be
easily converted into cash.

Fixed Asset Valuation Formula

Net Fixed Assets = Total Fixed Assets – Accumulated Depreciation
 Formulation of AS 10 Property,
Plant and Equipment

■ Removal of AS 6 on Depreciation Accounting.

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

equipment’ in place of AS 10 ‘Accounting for fixed

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

Recognition of the The determination of their

asset. carrying amounts.

The charges of Impairment losses to be

depreciation. recognized in relation to
the asset.
Scope of standard
This Standard should be applied in accounting for property, plant and
equipment except when another Accounting Standard requires or
permits a different accounting treatment.
Biological assets related to
This standard does not apply Wasting assets including
agricultural activity otherto:
mineral rights, expenditure
than bearer plants. This
on the exploration for and
Standard applies to bearer
extraction of minerals, oils,
plants but it does not apply
natural gas and similar non-
to the produce on bearer
regenerative resources.
plants, and
Definitions
Bearer plant is a plant that
(a)is used in the production or supply of agricultural produce;
(b) is expected to bear produce for more than a period of 12
months; and
(c)has a remote likelihood of being sold as agricultural produce,
except for incidental scrap sales. (when the plant no longer bear
produce, they are cut down and sold as scrap eg. for use as
firewood)

Agricultural Produce is the harvested product of biological assets

of the enterprise

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

producing asset of agricultural activity, therefore not covered by
PPE.
Depreciation is the systematic allocation of the depreciable amount
of an asset over its useful life.
Depreciable amount is the cost of an asset, or other amount
substituted for cost, less its residual value.

Fair value is the amount for which an asset could be exchanged

between knowledgeable, willing parties in an arm’s length
transaction in the market.
Residual value of an asset is the estimated amount that an enterprise
would currently obtain from disposal of the asset, after deducting the
estimated costs of disposal, if the asset were already of the age and
in the condition expected at the end of its useful life.
Useful life is:
(a) the period over which an asset is expected to be available for use
by an enterprise ; or
(b) the number of production or similar units expected to be obtained
from the asset by an enterprise.
Property, plant and equipment are tangible items that:

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

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

Eg, land, building, plant and machinery, furniture and fitting,

office equipment etc.
Measurement of cost of the asset

An organization’s accounting policy can be either the revaluation

model or the cost model, and it can be applied to the complete
class of its properties and P&E.

After recognizing the asset as a piece of property or plant and

equipment, it should be carried at cost less accumulated
depreciation and accumulated impairment losses, according to the
cost model (if any).

According to the revaluation model, once an asset is identified

and its fair value can be reliably established, it must be carried at
the revalued amount, which is the fair value of the asset at the
revaluation date less any cumulative depreciation and accumulated
impairment losses (if any).
 Recognition Criteria

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

recognised as an asset if, and only if:

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

item will flow to the enterprise and

b) Cost of the item can be measured reliably.

Under this recognition principle, all the costs on PPE shall be
evaluated by the enterprise at the time they are incurred.
The cost of PPE includes;
1. Initial Cost: cost incurred initially to acquire or construct the
PPE
2. Subsequent Cost: costs incurred subsequently to add to,
replace part of, or service it.
Elements of Cost
The cost of PPE comprises;

■ Its purchase price, including import duties and non –

refundable purchase taxes,, after deducting trade
discounts and rebates.

■ Any costs directly attributable to bringing the asset to

the location and condition

■ The initial estimate of decommissioning, restoration

and similar liabilities.
Measurement after Recognition
■ An enterprise should choose either the cost model or the
revaluation model as its accounting policy and should apply
that policy to an entire class of property, plant and equipment.

■ Cost Model: After recognition as an asset, an item of PPE

should be carried at its cost less any accumulated depreciation
and 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, being its fair value at the date of
the revaluation less any subsequent accumulated depreciation
and subsequent accumulated impairment losses.
DEPRECIATION

■ Depreciation is the systematic allocation of the depreciable amount

of an asset over its useful life. Depreciable amount is the cost of an
asset, or other amount substituted for cost, less its residual value.

■ Component cost approach is to be followed. i.e., 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.
Beginning & Cessation of
Depreciation
Beginning
•Depreciation of an asset •Depreciation of an
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.
Cessation
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.
Factors to be considered while
determining useful life
i. expected usage of the asset

ii. expected physical wear and tear

iii. technical or commercial obsolescence arising from

changes or improvements in production

iv. legal or similar limits on the use of the asset, such as the
expiry dates of related leases.
■ Depreciable assets are assets which

[1] are expected to be used during more than one accounting

period; and
[2] have a limited useful life; and
[3] are held by an enterprise for use in the production or supply
or for administrative purposes.

Depreciable amount of a depreciable asset is its historical cost,

or other amount substituted for historical cost less the estimated
residual value.
Methods of Depreciation

■ 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 depreciation methods given in AS itself are;

a) Straight-line method

b) The diminishing balance method

c) The units of production method

Straight Line Method
This is the simplest and most used depreciation method. It is best for smaller businesses
that are looking for a simple way to calculate depreciation.With the straight-line
method, you are calculating a depreciation amount that is the same year after year for
the life of the asset. This is what makes it the simplest method to use.
Example:
A company purchases a machine for $10,000 that has a useful life of 5 years and a
salvage value of $2,000 at the end of its useful life. The company will use the
straight-line depreciation method to depreciate the asset over its useful life. To
calculate the depreciation expense for each year, the company will use the following
formula:
Straight Line Depreciation Formula:
(Original Cost of the Asset - Salvage Value) / Estimated Useful Life of the Asset
In this case, the cost of the asset is $10,000, the salvage value is $2,000, and the useful
life is 5 years. Plugging these values into the formula, we get:
Depreciation expense = ($10,000 - $2,000) / 5
Depreciation expense = $1,600 per year
The company will record a depreciation expense of $1,600 per year for the next 5 years.
At the end of the useful life, the book value of the asset will be equal to the salvage
Declining Balance Method
This method is best suited for companies that have assets that lose value faster in the early years. Technology (such as computers
and cell phones) is an example of an asset that becomes obsolete quickly. The declining balance method provides larger
deductions sooner, minimizing tax exposure. It is considered a type of accelerated depreciation.
Example:
A company purchased a machine for $10,000, and they have decided to depreciate it using the declining balance method. The
company has estimated that the machine will have a useful life of three years and a salvage value of $1,000. To calculate the
annual depreciation expense, we will use the following formula:
Declining Balance Depreciation Formula :
Current Book Value x Depreciation Rate
The depreciation rate is calculated by dividing the straight-line rate by the chosen factor. In this case, the company has decided to
use a factor of 2, meaning that the depreciation rate will be twice the straight-line rate.
Straight-line rate = 1 / Useful Life = 1 / 5 = 0.2 or 20%

Depreciation rate = 2 x Straight-line rate = 2 x 0.2 = 0.4 or 40%

Year 1:
Beginning book value = $10,000
Depreciation Expense = $10,000 x 0.4 = $4,000
Ending book value = $10,000 - $4,000 = $6,000

Year 2:
Beginning book value = $6,000
Depreciation Expense = $6,000 x 0.4 = $2,400
Ending book value = $6,000 - $2,400 = $3,600

Year 3:
Beginning book value = $3,600
Depreciation Expense = $3,600 x 0.4 = $1,440
Ending book value = $3,600 - $1,440 = $2,160
 Units of Production Method
This depreciation method does not use time as a factor in calculating depreciation.
It uses the number of units an asset actually produces and the estimate of how
much it will produce over its lifetime.
Companies that produce or manufacture goods would find this method useful.
Example:
A company purchased a machine for $100,000 that is expected to have a total
production capacity of 500,000 units. In the first year, the machine produced
50,000 units.
Units of Production Depreciation Formula:
(Original Cost of the Asset - Salvage Value) / Estimated Units Produced Over
Asset's Lifetime x Actual Units Produced
Units-of-production depreciation = ($100,000 - $10,000) / 500,000 x 50,000
Units-of-production depreciation = $1.80 per unit
Therefore, the depreciation expense for the first year will be $1.80 x 50,000 =
$90,000. The remaining book value of the machine at the end of the first year
will be $100,000 - $90,000 = $10,000.
Thanks