Standard 10: Property, Plant and Equipment

Standard 10: Property, Plant and Equipment · Complied AI

(c)

has a remote likelihood of being sold as agricultural produce, except for incidental

scrap sales.

The following are not bearer plants:

(i)

plants cultivated to be harvested as agricultural produce (for example, trees grown for use as lumber);

(ii)

plants cultivated to produce agricultural produce when there is more than a remote likelihood that the

entity will also harvest and sell the plant as agricultural produce, other than as incidental scrap

sales (for example, trees that are cultivated both for their fruit and their lumber); and

(iii)

annual crops (for example, maize and wheat).

When bearer plants are no longer used to bear produce they might be cut down and sold as scrap, for example, for use

as firewood. Such incidental scrap sales would not prevent the plant from satisfying the definition of a bearer

plant.

Biological Asset is a living

animal 2 or plant.

Carrying amount is the

amount at which an asset is recognised after deducting any accumulated depreciation and accumulated

impairment losses.

Cost is the amount of cash or cash equivalents

paid or the fair value of the other consideration

given to acquire an asset at the time of its acquisition or construction or, where applicable, the

amount attributed to that asset when initially recognised in accordance with the specific requirements

of other Accounting Standards.

Depreciable amount is

the cost of an asset, or other amount substituted for cost, less its residual value.

Depreciation is the systematic

allocation of the depreciable amount of an

asset over its useful life .

Enterprise-specific

value is the present value of the cash flows an enterprise expects to arise from the

continuing use of an asset and from its disposal at the end of its useful life or expects to incur when

settling a liability.

Fair value is the amount for which

an asset could be exchanged between knowledgeable, willing parties in an arm’s length

transaction.

Gross carrying amount of an asset is its cost or other amount substituted for the cost in the books of account,

without making any deduction for accumulated depreciation and accumulated impairment losses.

An impairment loss is the amount

by which the carrying amount of an asset exceeds its

recoverable amount .

Property,

plant and equipment are tangible items that:

(b)

subsequently to add to, replace part of, or service it.

Initial Costs

11 The definition of ‘property, plant and equipment’ covers tangible items which are held for use or for

administrative purposes. The term ‘administrative purposes’ has been used in wider sense to include

all business purposes other than production or supply of goods or services or for rental for others. Thus,

property, plant and equipment would include assets used for selling and distribution, finance and accounting,

personnel and other functions of an enterprise. Items of property, plant and equipment may also be acquired for

safety or environmental reasons. The acquisition of such property, plant and equipment, although not directly

increasing the future economic benefi ts of any particular existing item of property, plant and equipment, may

be necessary for an enterprise to obtain the future economic benefits from its other assets. Such items of

property, plant and equipment 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. For 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 .

Subsequent Costs

12 Under the recognition principle in paragraph 7 , an enterprise does

not recognise in the carrying amount of an item of property, plant and equipment 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. 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 property, plant and equipment.

13 Parts of some items of property, plant and equipment may require replacement at regular intervals. For example, a

furnace may require relining after a specified number of hours of use, or aircraft interiors such as seats and

galleys may require replacement several times during the life of the airframe. Similarly, major parts of

conveyor system, such as, conveyor belts, wire ropes, etc., may require replacement several times during the

life of the conveyor system. Items of property, plant and equipment may also be acquired to make a less

frequently recurring replacement, such as replacing the interior walls of a building, or to make a non-recurring

replacement. Under the recognition principle in paragraph 7 , an

enterprise recognises in the carrying amount of an item of property, plant and equipment the cost of replacing

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

those parts that are replaced is derecognised in accordance with the derecognition provisions of this Standard

(see paragraphs 74 - 80 ).

14 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

major inspection is performed, its cost is recognised in the carrying amount of the item of property, plant and

equipment 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.

15 The derecognition of the carrying amount as stated in paragraphs 13-14 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 indication of

what the cost of the replaced part/ existing inspection component was when the item was acquired or constructed.

Measurement at Recognition

16. An item of property, plant and equipment that qualifies for

recognition as an asset should be measured at its cost.

Elements of Cost

17 The cost of an item of property, plant and equipment comprises:

(c)

costs of relocating or reorganising part or all of the operations of an enterprise.

22 Some operations occur in connection with the construction or development of an item of property, plant and

equipment, 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. For 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 item 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.

23 The cost of a self-constructed asset is determined using the same principles as for an acquired asset. 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 (see AS 2 ). Therefore, any internal profits are

eliminated in arriving at such costs. Similarly, the 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. AS 16, Borrowing Costs , establishes

criteria for the recognition of interest as a component of the carrying amount of a self-constructed item of

property, plant and equipment.

24 Bearer plants are accounted for in the same way as self-constructed items of property, plant and equipment before

they are in the location and condition necessary to be capable of operating in the manner intended by

management. Consequently, references to ‘construction’ in this Standard should be read as covering

activities that are necessary to cultivate the bearer plants before they are in the location and condition

necessary to be capable of operating in the manner intended by management.

Measurement of Cost

25 The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date. If

payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total

payment is recognised as interest over the period of credit unless such interest is capitalised in accordance

with AS 16 .

26 One or more items of property, plant and equipment may be acquired in exchange for a non-monetary asset or assets,

or a combination of monetary and non-monetary assets. The following discussion refers simply to an exchange of

one non-monetary asset for another, but it also applies to all exchanges described in the preceding sentence.

The cost of such an item of property, plant and equipment is measured at fair value unless (a) the exchange

transaction lacks commercial substance or (b) the fair value of neither the asset(s) received nor the asset(s)

given up is reliably measurable. The acquired item(s) is/are measured in this manner even if an enterprise

cannot immediately derecognise the asset given up. 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.

27 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:

(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.

28 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.

29 Where several items of property, plant and equipment 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. In

case the fair values of the items acquired cannot be measured reliably, these values are estimated on a fair

basis as determined by competent valuers.

30 The cost of an item of property, plant and equipment held by a lessee under a finance lease is determined in

accordance with AS 19, Leases .

31 The carrying amount of an item of property, plant and equipment may be reduced by government grants in accordance

with AS 12, Accounting for Government

Grants .

Measurement after Recognition

32 An enterprise should choose either the cost model in

paragraph 33 or the revaluation model in paragraph 34

as its accounting policy and should apply that policy to an entire class of property, plant and equipment.

Cost Model

33 After recognition as an asset, an item of property, plant and

equipment should be carried at its cost less any accumulated depreciation and any accumulated impairment losses.

Revaluation Model

34 After recognition as an asset, an item of property, plant and

equipment 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. 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.

35 The fair value of items of property, plant and equipment is usually determined from market-based evidence by

appraisal that is normally undertaken by professionally qualified valuers.

36 If there is no market-based evidence of fair value because of the specialised nature of the item of property,

plant and equipment 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 (for example, based on discounted cash flow projections) or a

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.

37 The frequency of revaluations depends upon the changes in fair values of the items of property, plant and

equipment being revalued. When the fair value of a revalued asset differs materially from its carrying amount, a

further revaluation is required. Some items of property, plant and equipment experience significant and volatile

changes in fair value, thus necessitating annual revaluation. Such frequent revaluations are unnecessary for

items of property, plant and equipment with only insignificant changes in fair value. Instead, it may be

necessary to revalue the item only every three or five years.

38 When an item of property, plant and equipment 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:

(i)

bearer plants.

41 The items within a class of property, plant and equipment 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. However, a class of assets may be revalued on a rolling basis provided revaluation

of the class of assets is completed within a short period and provided the revaluations are kept up to date.

42 An increase in the carrying amount of an asset arising on revaluation

should be credited directly to owners’ interests under the heading of revaluation surplus. However, the

increase should be recognised in the statement of profit and loss to the extent that it reverses a revaluation

decrease of the same asset previously recognised in the statement of profit and loss.

43 A decrease in the carrying amount of an asset arising on revaluation

should be charged to the statement of profit and loss. However, the decrease should be debited directly to

owners’ interests under the heading of revaluation surplus to the extent of any credit balance existing in

the revaluation surplus in respect of that asset.

44. The revaluation surplus included in owners’ interests in respect of an item of property, plant and

equipment may be transferred to the revenue reserves when the asset is derecognised. This may involve

transferring the whole of the surplus when the asset is retired or disposed of. However, 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 the difference between depreciation based on the revalued carrying amount of the asset and depreciation

based on its original cost. Transfers from revaluation surplus to the revenue reserves are not made through the

statement of profit and loss.

Depreciation

45. 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.

46 An enterprise allocates the amount initially recognised in respect of an item of property, plant and equipment to

its significant parts and depreciates each such part separately. For example, it may be appropriate to

depreciate separately the airframe and engines of an aircraft, whether owned or subject to a finance lease.

47 A significant part of an item of property, plant and equipment 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.

48 To the extent that an enterprise depreciates separately some parts of an item of property, plant and equipment, it

also depreciates separately the remainder of the item. The remainder consists of the parts of the item that are

individually not significant. If an enterprise has varying expectations for these parts, approximation

techniques may be necessary to depreciate the remainder in a manner that faithfully represents the consumption

pattern and/or useful life of its parts.

49 An enterprise may choose to depreciate separately the parts of an item that do not have a cost that is significant

in relation to the total cost of the item.

50. The 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.

51. The depreciation charge for a period is usually recognised in the statement of profit and loss. However,

sometimes, the future economic benefits embodied in an asset are absorbed in producing other assets. In this

case, the depreciation charge constitutes part of the cost of the other asset and is included in its carrying

amount. For example, the depreciation of manufacturing plant and equipment is included in the costs of

conversion of inventories (see AS 2). Similarly, the depreciation of property, plant and equipment used for

development activities may be included in the cost of an intangible asset recognised in accordance with AS 26, Intangible Assets .

Depreciable Amount and Depreciation Period

52 The depreciable amount of an asset should be allocated on a systematic basis over its useful life.

53 The 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 .

54 Depreciation is recognised even if the fair value of the asset exceeds its carrying amount, as long as the

asset’s residual value does not exceed its carrying amount. Repair and maintenance of an asset do not

negate the need to depreciate it.

55 The depreciable amount of an asset is determined after deducting its residual value.

56 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.

57 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. 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. Therefore, depreciation does not cease when the asset becomes idle or

is retired 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.

58 The future economic benefits embodied in an asset are consumed by an enterprise principally through its use.

However, other factors, such as technical or commercial obsolescence and wear and tear while an asset remains

idle, often result in the diminution of the economic benefits that might have been obtained from the asset.

Consequently, all the following factors are considered in determining the useful life of an asset:

(d)

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

59 The useful life of an asset is defined in terms of its expected utility to the enterprise. The asset management

policy of the enterprise may involve the disposal of assets after a specified time or after consumption of a

specified proportion of the future economic benefits embodied in the asset. Therefore, the useful life of an

asset may be shorter than its economic life. The estimation of the useful life of the asset is a matter of

judgement based on the experience of the enterprise with similar assets.

60 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. 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.

61 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. In some cases, the land

itself may have a limited useful life, in which case it is depreciated in a manner that reflects the benefits to

be derived from it.

Depreciation Method

62 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.

63 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.

64 A variety of depreciation methods can be used to allocate the depreciable amount of an asset on a systematic basis

over its useful life. These methods include the straight-line method, the diminishing balance method and the

units of production method. Straight-line depreciation results in a constant charge over the useful life if the

residual value of the asset does not change. The diminishing balance method results in a decreasing charge over

the useful life. The units of production method results in a charge based on the expected use or output. The

enterprise selects the method that most closely reflects the expected pattern of consumption of the future

economic benefits embodied in the asset. That method is applied consistently from period to period unless there

is a change in the expected pattern of consumption of those future economic benefits or that the method is

changed in accordance with the statute to best reflect the way the asset is consumed.

65 A depreciation method that is based on revenue that is generated by an activity that includes the use of an asset

is not appropriate. The revenue generated by an activity that includes the use of an asset generally reflects

factors other than the consumption of the economic benefits of the asset. For example, revenue is affected by

other inputs and processes, selling activities and changes in sales volumes and prices. The price component of

revenue may be affected by inflation, which has no bearing upon the way in which an asset is consumed.

Changes in Existing Decommissioning, Restoration and Other Liabilities

66 The cost of property, plant and equipment 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 and included in the

cost of the asset in accordance with paragraph 16 . Such changes in

cost should be accounted for in accordance with paragraphs 67–68 below.

67 If the related asset is measured using the cost model:

(b)

when no future economic benefits are expected from its use or disposal.

75 The gain or loss arising from the derecognition of an item of property, plant and equipment should

be included in the statement of profit and loss when the item is derecognised (unless AS 19, Leases, requires

otherwise on a sale and leaseback). Gains should not be classified as revenue, as defined in AS 9, Revenue Recognition .

76 However, an enterprise that in the course of its ordinary activities, routinely sells items of

property, plant and equipment 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, Revenue Recognition.

77 The disposal of an item of property, plant and equipment may occur in a variety of ways (e.g. by sale, by entering

into a finance lease or by donation). In determining the date of disposal of an item, an enterprise applies the

criteria in AS 9 for recognising revenue from the sale of goods. AS 19, Leases , applies to disposal by a

sale and leaseback.

78 If, under the recognition principle in paragraph 7 , an enterprise

recognises in the carrying amount of an item of property, plant and equipment the cost of a replacement for part

of the item, then it derecognises the carrying amount of the replaced part regardless of whether the replaced

part had been depreciated separately. If it is not practicable for an enterprise to determine the carrying

amount of the replaced part, i t may use the cost of the replacement as an indication of what the cost of the

replaced part was at the time it was acquired or constructed.

79. The gain or loss arising from the derecognition of an item of

property, plant and equipment should be determined as the difference between the net disposal proceeds, if any,

and the carrying amount of the item.

80. The consideration receivable on disposal of an item of property, plant and

equipment is recognised in accordance with the principles enunciated in AS 9 .

Disclosure

81 The financial statements should disclose, for each class of property, plant and equipment:

(d)

the carrying amount of property, plant and equipment retired from active use and not held for disposal.

Proviso

Provided that a Micro, Small and Medium-sized non-company entity as defined in Appendix I to

this Compendium, may not comply with paragraph 87.

Transitional Provisions 3

88 Where an entity has in past recognized an expenditure in the statement of profit and loss which is

eligible to be included as a part of the cost of a project for construction of property, plant and equipment in

accordance with the requirements of paragraph 9, it may do so retrospectively for such a project. The effect of

such retrospective application of this requirement, should be recognised net-of-tax in revenue reserves.

89 The requirements of paragraphs 26-28 regarding the initial measurement of an item of property, plant

and equipment acquired in an exchange of assets transaction should be applied prospectively only to transactions

entered into after this Standard becomes mandatory.

90 On the date of this Standard becoming mandatory, the spare parts, which hitherto were being treated

as inventory under AS 2, Valuation of Inventories, and are now required to be capitalised in accordance with the

requirements of this Standard, should be capitalised at their respective carrying amounts. The spare parts so

capitalised should be depreciated over their remaining useful lives prospectively as per the requirements of

this Standard.

91 The requirements of paragraph 32 and paragraphs 34 – 44 regarding the revaluation model should

be applied prospectively. In case, on the date of this Standard becoming mandatory, an enterprise does not adopt

the revaluation model as its accounting policy but the carrying amount of item(s) of property, plant and

equipment reflects any previous revaluation it should adjust the amount outstanding in the revaluation reserve

against the carrying amount of that item. However, the carrying amount of that item should never be less than

residual value. Any excess of the amount outstanding as revaluation reserve over the carrying amount of that

item should be adjusted in revenue reserves.

Footnotes

* AS 10, Accounting for Fixed Assets, was initially issued in

1985. The Standard was revised and titled as ‘Property, Plant and Equipment’ by the Ministry of Corporate