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Exposure Draft of the Accounting Standard (AS) 10 (Revised) :Property Plant and Equipment (Comments to be received by December 18, 2014).
November, 25th 2014

 

                        1
                                      Exposure Draft

                     Accounting Standard (AS) 10 (revised)

                        Property, Plant and Equipment
Following is the Exposure Draft of the revised Accounting Standard (AS) 10, Property, Plant
and Equipment , issued by the Accounting Standards Board of the Institute of Chartered
Accountants of India, for comments. The Board invites comments on any aspect of this Exposure
Draft. The Board would particularly welcome answers to the questions set out below. Comments
are most helpful if they indicate the specific paragraph or group of paragraphs to which they
relate, contain a clear rationale and, where applicable, provide a suggestion for alternative
wording.

Comments can be submitted using one of the following methods, so as to be received not later
than December 18, 2014:

   1. Electronically: Click on http://www.icai.org/comments/asb/ to submit comments online.
   2. Email: Comments can be sent to commentsasb@icai.in
   3. Postal: Secretary, Accounting Standards Board, The Institute of Chartered Accountants
      of India, ICAI Bhawan, Post Box No. 7100, Indraprastha Marg, New Delhi ­ 110 002,.

Further clarifications on any aspect of this Exposure Draft may be sought by e-mail to
geetanshu.bansal@icai.in.


(This Accounting Standard includes paragraphs set in bold italic type and plain type, which have
equal authority. Paragraphs in bold italic type indicate the main principles. This Standard
should be read in the context of the Preface to the Statements of Accounting Standards issued by
the Institute of Chartered Accountants of India).




Question 1.
Paragraph 25 of the Exposure Draft proposes that the cost of an item of property, plant and
equipment is the cash price equivalent at the recognition date. As per the definition of cost given
in paragraph 6 of the Exposure Draft, cost is the amount of cash or cash equivalents paid or the
fair value of the other considerationcan be 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. This
definition is also contained in IAS 16 and Ind AS 16. One view can be that the term "cash
equivalents" used in the definition is different from the term "cash price equivalents" used in


                                                 2
paragraph 25 of this Standard. According to this view, the term "cash equivalents" be replaced
by "cash price equivalents" in the definition. The other view is that the "cash equivalents"
should be considered as short term, highly liquid investments that are readily convertible into
known amounts of cash and which are subject to an insignificant risk of changes in value
(definition of `cash equivalents' as per AS 3). The reasoning for this view is that "cash
equivalents" is used in the definition to represent "cash" paid as a consideration for acquiring
the asset.
Do you think it is appropriate to use the term "cash price equivalent" instead of "cash
equivalents" in the definition of "cost" in order to avoid interpretational issues.? Why or why
not?


Question 2.
In paragraph 60 of the Exposure Draft, it is proposed to clarify that where land cannot be
transacted separately from a building, in such cases the land and building can be recognised as
a single asset. This clarification is not there in IAS 16 and Ind AS 16. Do you agree with the
proposed clarification? Why or Why not?


Question 3.
The Exposure Draft of AS 10 proposes certain disclosure requirements in paragraph 86 which
an enterprise is encouraged to disclose and not required to do so mandatorily. In the Board's
view, these disclosures are relevant for the users. Do you agree with the proposed. Why or Why
not? If not, what changes do you recommend and why?

Objective
1.      The objective of this Standard is to prescribe the accounting treatment for property, plant
and equipment so that users of the financial statements can discern information about investment
made by an enterprise in its property, plant and equipment and the changes in such investment.
The principal issues in accounting for property, plant and equipment are the recognition of the
assets, the determination of their carrying amounts and the depreciation charges and impairment
losses to be recognised in relation to them.



Scope
2.     This Standard should be applied in accounting for property, plant and equipment
except when another Accounting Standard requires or permits a different accounting
treatment.
3.     This Standard does not apply to:




                                                3
        (a)      biological assets related to agricultural activity other than bearer plants. This
                 Standard applies to bearer plants but it does not apply to the produce on bearer
                 plants ; and
        (b)      wasting assets including mineral rights, expenditure on the exploration for and
                 extraction of minerals, oil, natural gas and similar non-regenerative resources.


        However, this Standard applies to property, plant and equipment used to develop or
        maintain the assets described in (a) and (b) above.
4.     Other Accounting Standards may require recognition of an item of property, plant and
equipment based on an approach different from that in this Standard. For example, AS 19,
Leases, requires an enterprise to evaluate its recognition of an item of leased property, plant and
equipment on the basis of the transfer of risks and rewards. However, in such cases other aspects
of the accounting treatment for these assets, including depreciation, are prescribed by this
Standard.


5.     An enterprise should apply AS 13, Accounting for Investments, to property that is being
constructed or developed for future use as investment property.



Definitions
6.      The following terms are used in this Standard with the meanings specified:
        Agricultural Activity is the management by an enterprise of the biological
        transformation and harvest of biological assets for sale or for conversion into
        agricultural produce or into additional biological assets.
        Agricultural Produce is the harvested product of biological assets of the enterprise.
        Bearer plant is a plant that
              (a) is used in the production of supply of agricultural produce;
              (b) is expected to bear produce for more than one period; and
              (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


                                                  4
              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 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:
      (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 one period.
      Recoverable amount is the higher of an asset's net selling price and its value in use.


      The 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



                                                5
       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.



Recognition
7.      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)     the cost of the item can be measured reliably.




8.     Items such as spare parts, stand-by equipment and servicing equipment are recognised in
accordance with this Standard when they meet the definition of property, plant and equipment.
Otherwise, such items are classified as inventory.
9.      This Standard does not prescribe the unit of measure for recognition, i.e., what constitutes
an item of property, plant and equipment. Thus, judgement is required in applying the
recognition criteria to specific circumstances of an enterprise. An example of a `unit of measure'
can be a `project' of construction of a manufacturing plant rather than individual assets
comprising the project in appropriate cases for the purpose of capitalisation of expenditure
incurred during construction period. Similarly, it may be appropriate to aggregate individually
insignificant items, such as moulds, tools and dies and to apply the criteria to the aggregate
value. An enterprise may decide to expense an item which could otherwise have been included
as property, plant and equipment, because the amount of the expenditure is not material.





10.   An enterprise evaluates under this recognition principle all its costs on property, plant and
equipment at the time they are incurred. These costs include costs incurred:
       (a)     initially to acquire or construct an item of property, plant and equipment; and
       (b)     subsequently to add to, replace part of, or service it.




                                                  6
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 benefits 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 or faults regardless of


                                                7
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:
       (a)    its purchase price, including import duties and non ­refundable purchase taxes,,
              after deducting trade discounts and rebates.
       (b)    any costs directly attributable to bringing the asset to the location and condition
              necessary for it to be capable of operating in the manner intended by
              management.
       (c)    the initial estimate of the costs of dismantling and removing the item and
              restoring the site on which it is located, the obligation for which an enterprise
              incurs either when the item is acquired or as a consequence of having used the
              item during a particular period for purposes other than to produce inventories
              during that period.
18.    Examples of directly attributable costs are:
       (a)    costs of employee benefits (as defined in AS 15, Employee Benefits) arising
              directly from the construction or acquisition of the item of property, plant and
              equipment;
       (b)    costs of site preparation;
       (c)    initial delivery and handling costs;
       (d)    installation and assembly costs;


                                                 8
       (e)    costs of testing whether the asset is functioning properly, after deducting the net
              proceeds from selling any items produced while bringing the asset to that location
              and condition (such as samples produced when testing equipment); and
       (f)    professional fees.
19.     An enterprise applies AS 2, Valuation of Inventories, to the costs of obligations for
dismantling, removing and restoring the site on which an item is located that are incurred during
a particular period as a consequence of having used the item to produce inventories during that
period. The obligations for costs accounted for in accordance with AS 2 or AS 10 are
recognised and measured in accordance with AS 29, Provisions, Contingent Liabilities and
Contingent Assets.


20.    Examples of costs that are not costs of an item of property, plant and equipment are:
       (a)    costs of opening a new facility or business, such as, inauguration costs;
       (b)    costs of introducing a new product or service( including costs of advertising and
              promotional activities);
       (c)    costs of conducting business in a new location or with a new class of customer
              (including costs of staff training); and
       (d)    administration and other general overhead costs.
21.     Recognition of costs in the carrying amount of an item of property, plant and equipment
ceases when the item is in the location and condition necessary for it to be capable of operating
in the manner intended by management. Therefore, costs incurred in using or redeploying an
item are not included in the carrying amount of that item. For example, the following costs are
not included in the carrying amount of an item of property, plant and equipment:
       (a)    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;
       (b)    initial operating losses, such as those incurred while demand for the output of an
              item builds up; and
       (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.


                                                9
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:
       (a)     the configuration (risk, timing and amount) of the cash flows of the asset received
               differs from the configuration of the cash flows of the asset transferred; or
       (b)     the enterprise-specific value of the portion of the operations of the enterprise
               affected by the transaction changes as a result of the exchange;
       (c)     and the difference in (a) or (b) is significant relative to the fair value of the assets
               exchanged.



                                                 10
       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 33 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.




                                                 11
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:
       (a)     the gross carrying amount is adjusted in a manner that is consistent with the
               revaluation of the carrying amount of the asset. For example, the gross carrying
               amount may be restated by reference to observable market data or it may be
               restated proportionately to the change in the carrying amount. The accumulated
               depreciation at the date of the revaluation is adjusted to equal the difference
               between the gross carrying amount and the carrying amount of the asset after
               taking into account accumulated impairment losses; or
       (b)      the accumulated depreciation is eliminated against the gross carrying amount of
               the asset.


       The amount of the adjustment of accumulated depreciation forms part of the increase or
       decrease in carrying amount that is accounted for in accordance with paragraphs 42 and
       43.
39.    If an item of property, plant and equipment is revalued, the entire class of property,
plant and equipment to which that asset belongs should be revalued.
40.     A class of property, plant and equipment is a grouping of assets of a similar nature and
use in operations of an enterprise. The following are examples of separate classes:
       (a)     land;
       (b)     land and buildings;



                                                12
       (c)     machinery;
       (d)     ships;
       (e)     aircraft;
       (f)     motor vehicles;
       (g)     furniture and fixtures;
       (h)     office equipment;and
       (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



                                                13
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.




                                                 14
55.     The depreciable amount of an asset is determined after deducting its residual value. In
practice, the residual value of an asset is often insignificant and therefore immaterial in the
calculation of the depreciable amount.
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:
       (a)     expected usage of the asset. Usage is assessed by reference to the expected
               capacity or physical output of the asset.
       (b)     expected physical wear and tear, which depends on operational factors such as the
               number of shifts for which the asset is to be used and the repair and maintenance
               programme, and the care and maintenance of the asset while idle.
       (c)    technical or commercial obsolescence arising from changes or improvements in
              production, or from a change in the market demand for the product or service
              output of the asset. Expected future reductions in the selling price of an item that
              was produced using an asset could indicate the expectation of technical or
              commercial obsolescence of the asset, which, in turn, might reflect a reduction of
              the future economic benefits embodied in the 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. However where land cannot be transacted separately from the building, in
such cases the land and building can be recognised as a single asset. With some exceptions, such
as quarries and sites used for landfill, land has an unlimited useful life and therefore is not


                                                 15
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 Similar 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


                                                 16
paragraph 16. Such changes in cost should be accounted for in accordance with paragraphs
67­68 below.
67.    If the related asset is measured using the cost model:
       (a)    subject to (b), changes in the liability should be added to, or deducted from, the
              cost of the related asset in the current period.
       (b)    the amount deducted from the cost of the asset should not exceed its carrying
              amount. If a decrease in the liability exceeds the carrying amount of the asset,
              the excess should be recognised immediately in the statement of profit and loss.
       (c)    if the adjustment results in an addition to the cost of an asset, the enterprise
              should consider whether this is an indication that the new carrying amount of
              the asset may not be fully recoverable. If it is such an indication, the enterprise
              should test the asset for impairment by estimating its recoverable amount, and
              should account for any impairment loss, in accordance with AS 28.
68.    If the related asset is measured using the revaluation model:
       (a)    changes in the liability alter the revaluation surplus or deficit previously
              recognised on that asset, so that:
              (i)     a decrease in the liability should (subject to (b)) be credited directly to
                      revaluation surplus in the owners' interest, except that it should be
                      recognised in the statement of profit and loss to the extent that it
                      reverses a revaluation deficit on the asset that was previously recognised
                      in the statement of profit and loss;
              (ii)    an increase in the liability should be recognised in the statement of
                      profit and loss, except that it should be debited directly to revaluation
                      surplus in the owners' interest to the extent of any credit balance
                      existing in the revaluation surplus in respect of that asset.
       (b)    in the event that a decrease in the liability exceeds the carrying amount that
              would have been recognised had the asset been carried under the cost model,
              the excess should be recognised immediately in the statement of profit and loss.
       (c)    a change in the liability is an indication that the asset may have to be revalued
              in order to ensure that the carrying amount does not differ materially from that
              which would be determined using fair value at the balance sheet date. Any such
              revaluation should be taken into account in determining the amounts to be
              taken to the statement of profit and loss and the owners' interest under (a). If a
              revaluation is necessary, all assets of that class should be revalued.
69.    The adjusted depreciable amount of the asset is depreciated over its useful life.
Therefore, once the related asset has reached the end of its useful life, all subsequent changes
in the liability should be recognised in the statement of profit and loss as they occur. This
applies under both the cost model and the revaluation model.




                                              17
Impairment
70.    To determine whether an item of property, plant and equipment is impaired, an enterprise
applies AS 28, Impairment of Assets. AS 28 explains how an enterprise reviews the carrying
amount of its assets, how it determines the recoverable amount of an asset, and when it
recognises, or reverses the recognition of, an impairment loss.


Compensation for Impairment
71.    Compensation from third parties for items of property, plant and equipment that were
impaired, lost or given up should be included in the statement of profit and loss when the
compensation becomes receivable.
72.    Impairments or losses of items of property, plant and equipment, related claims for or
payments of compensation from third parties and any subsequent purchase or construction of
replacement assets are separate economic events and are accounted for separately as follows:
       (a)    impairments of items of property, plant and equipment are recognised in
              accordance with AS 28;
       (b)    derecognition of items of property, plant and equipment retired or disposed of is
              determined in accordance with this Standard;
       (c)    compensation from third parties for items of property, plant and equipment that
              were impaired, lost or given up is included in determining profit or loss when it
              becomes receivable; and
       (d)    the cost of items of property, plant and equipment restored, purchased or
              constructed as replacements is determined in accordance with this Standard.
Retirements
73.    Items of property, plant and equipment retired from active use and held for disposal
should be stated at the lower of their carrying amount and net realisable value. Any write-
down in this regard should be recognised immediately in the statement of profit and loss.

Derecognition
74.    The carrying amount of an item of property, plant and equipment should be
derecognised
       (a)    on disposal; or
       (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



                                              18
(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, it 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 AS 9. If payment for the item is deferred, the consideration
received is recognised initially at the cash price equivalent. The difference between the nominal
amount of the consideration and the cash price equivalent is recognised as interest revenue
reflecting the effective yield on the receivable.

Disclosure
81.   The financial statements should disclose, for each class of property, plant and
equipment:
       (a)     the measurement bases (i.e., cost model or revaluation model)              used for
               determining the gross carrying amount;
       (b)     the depreciation methods used;
       (c)     the useful lives or the depreciation rates used. In case the useful lives or the
               depreciation rates used are different from those specified in the statute
               governing the enterprise, it should make a specific mention of that fact;
       (d)     the gross carrying amount and the accumulated depreciation (aggregated with
               accumulated impairment losses) at the beginning and end of the period; and
       (e)     a reconciliation of the carrying amount at the beginning and end of the period
               showing:



                                                19
               (i)     additions;
               (ii)    assets retired from active use and held for disposal;(iii)   acquisitions
                        through business combinations ;
               (iv)    increases or decreases resulting from revaluations under paragraphs 34,
                       42 and 43 and from impairment losses recognised or reversed directly in
                       revaluation surplus in accordance with AS 28;
               (v)     impairment losses recognised in the statement of profit and loss in
                        accordance with AS 28;
               (vi)    impairment losses reversed in the statement of profit and loss in
                       accordance with AS 28;


               (vii)   depreciation;
                (viii) the net exchange differences arising on the translation of the financial
                       statements of a non-integral foreign operation in accordance with AS
                       11, The Effects of Changes in Foreign Exchange Rates; and
               (ix)    other changes.


82.    The financial statements should also disclose:
       (a)     the existence and amounts of restrictions on title, and property, plant and
               equipment pledged as security for liabilities;
       (b)     the amount of expenditure recognised in the carrying amount of an item of
               property, plant and equipment in the course of its construction;
       (c)     the amount of contractual commitments for the acquisition of property, plant
               and equipment;
       (d)    if it is not disclosed separately on the face of the statement of profit and loss, the
              amount of compensation from third parties for items of property, plant and
              equipment that were impaired, lost or given up that is included in the statement
              of profit and loss; and
       (e) the amount of assets retired from active use and held for disposal.


83.     Selection of the depreciation method and estimation of the useful life of assets are matters
of judgement. Therefore, disclosure of the methods adopted and the estimated useful lives or
depreciation rates provides users of financial statements with information that allows them to
review the policies selected by management and enables comparisons to be made with other
enterprises. For similar reasons, it is necessary to disclose:
       (a)     depreciation, whether recognised in the statement of profit and loss or as a part of
               the cost of other assets, during a period; and


                                                 20
       (b)    accumulated depreciation at the end of the period.
84.     In accordance with AS 5, an enterprise discloses the nature and effect of a change in an
accounting estimate that has an effect in the current period or is expected to have an effect in
subsequent periods. For property, plant and equipment, such disclosure may arise from changes
in estimates with respect to:
       (a)    residual values;
       (b)    the estimated costs of dismantling, removing or restoring items of property, plant
              and equipment;
       (c)    useful lives; and
       (d)    depreciation methods.
85.    If items of property, plant and equipment are stated at revalued amounts, the following
should be disclosed:
       (a)    the effective date of the revaluation;
       (b)    whether an independent valuer was involved;
       (c)    the methods and significant assumptions applied in estimating fair values of the
              items;
       (d)    the extent to which fair values of the items were determined directly by
              reference to observable prices in an active market or recent market transactions
              on arm's length terms or were estimated using other valuation techniques;and


       (e)    the revaluation surplus, indicating the change for the period and any
              restrictions on the distribution of the balance to shareholders.
86.    In accordance with AS 28, an enterprise discloses information on impaired property,
plant and equipment in addition to the information required by paragraph 81 (e), (iv), (v) and
(vi).
87.    Users of financial statements may also find the following information relevant to their
needs:
       (a)    the carrying amount of temporarily idle property, plant and equipment;
       (b)    the gross carrying amount of any fully depreciated property, plant and equipment
              that is still in use;
       (c)    for each revalued class of property, plant and equipment, the carrying amount that
              would have been recognised had the assets been carried under the cost model; and
       (d)    the carrying amount of property, plant and equipment retired from active use and
              not held for disposal; and
        (e)   when the cost model is used, the fair value of property, plant and equipment when
              this is materially different from the carrying amount.



                                               21
       Therefore, enterprises are encouraged to disclose these amounts.



Transitional Provisions
88.    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.
89.    The component approach prescribed in this Standard, i.e., the requirements of this
Standard concerning separate depreciation of parts of an item of property, plant and
equipment (see paragraphs 45-49) and concerning capitalisation of cost of replacing such
parts (see paragraphs 13-14) are applicable in respect of items of property, plant and
equipment on the date this standard becomes mandatory.The effect of application of this
requirement, if any, should be recognised net-of-tax


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.     In case an entity has not earlier capitalised the costs of dismantling and removing the
item of property, plant and equipment and restoring the site on which it is located, on the date
of this Standard becoming mandatory, it should make an estimate of the costs of dismantling
and removing the item and restoring the site on which it is located and should capitalise the
same as per the requirements of this Standard with a corresponding provision created as per
the requirements of AS 29, Provisions, Contingent Liabilities and Contingent Assets . In such
a case, the depreciation on the incremental amount capitalised should be calculated from the
date on which the item was put to use and additional depreciation (as adjusted by any related
deferred tax) arising from retrospective computation of depreciation should be adjusted
against the opening balance of revenue reserves and surplus.
92.     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:
       (a)    the asset which has been revalued may continue at the revalued amount;
       (b)    as the asset is used by the enterprise, the enterprise may transfer out of the
              revaluation surplus, to the statement of profit and loss, an amount equivalent to
              the difference between depreciation based on the carrying amount of the
              revalued asset and the depreciation based on the original cost, for accounting
              periods not exceeding five accounting periods commencing with the accounting
              period in respect of which this Standard comes into force. Thus, for the


                                              22
       aforesaid accounting periods, the enterprise may not transfer the revaluation
       surplus in respect of previously revalued asset during the use of the asset as
       envisaged in paragraph 44. Thereafter, paragraph 44 should be applied.
In such a case the enterprise should disclose the fact that the transitional provisions of
this Standard are being followed and the revaluations are not up-dated, and give the
date of the last revaluation and the amount of the revalued asset.




                               _______________




                                       23
                                                                                  Appendix A


Comparison with Accounting with Accounting Standard (AS) 10,
`Accounting for Fixed Assets'.

Note: This Appendix is not a part of the Accounting Standard. The purpose of this Appendix is to bring
out the objectives and reasons for the revision to AS 10, Accounting for Fixed Assets and major
differences between Accounting Standard (AS)10, Accounting for Fixed Assets (issued 1985) and AS 10
(Revised) Property, Plant and Equipment.



Objectives of revision to AS 10 (issued 1985)

Accounting Standard (AS) 10, Property, Plant and Equipment, has been revised primarily to
(i) improve accounting for fixed assets by requiring component based accounting; (ii)
clarifying that only those costs that are necessary to be incurred to make the asset available
for use in the intended manner; (iii) incorporate changes consequential to the requirements
contained in Accounting Standard 29, Provisions, Contingent Liabilities and Contingent
Assets, in respect of the provision made for costs of dismantling and removing the items and
restoring the site on which an asset is located, the obligation for which an entity incurs when
the item is acquired or as a consequence of having used the item during a particular period
for purposes other than to produce inventories during that period; (iv) improve accounting for
spares; and (v) bring about consistency between this standard and other Accounting
Standards.
 AS 10 (revised) deals with accounting for property, plant and equipment which are covered by
pre-revised AS 10, Accounting for Fixed Assets. The revised Standard also deals with
depreciation of property, plant and equipment which is presently covered by AS 6, Depreciation
Accounting. Therefore, the major differences mentioned below are between the revised AS 10
and pre-revised AS 10 (1985) and pre-revised AS 6.



1.      The scope of AS 10 has been extended to include bearer plants related to agricultural
        activity. Accordingly, paragraph 3 has been amended and definition of agricultural
        activity has been included in paragraph 6.


2.      The definition of `property, plant and equipment' given in paragraph 6 has been
        modified to make it comprehensive as per the international best practices.




                                                 24
3.    The revised AS 10, apart from defining the term property, plant and equipment, also lays
      down the following criteria in paragraph 7, which should be satisfied for recognition of
      items of property, plant and equipment:

      (a)    it is probable that future economic benefits associated with the item will flow to
      the entity, and
      (b)    the cost of the item can be measured reliably.


      AS 10 (1985) does not lay down any specific recognition criteria for recognition of a
      fixed asset. As per the standard, any item which meets the definition of a fixed asset
      should be recognised as a fixed asset.


4.   As per the revised AS 10, initial costs as well as the subsequent costs are evaluated on the
      same recognition principles to determine whether the same should be recognised as an
      item of property, plant and equipment. AS 10 (1985), on the other hand, prescribes
      separate recognition principles for subsequent expenditure.       As per AS 10 (1985),
      subsequent expenditures related to an item of fixed asset are capitalised only if they
      increase the future benefits from the existing asset beyond its previously assessed
      standard of performance. (paragraph 10)


5.   With regard to accounting for spare parts and stand-by equipments, the existing paragraph
      8.2 of AS 10 (1985) requires that stand-by equipment and servicing equipment are
      normally capitalised. Machinery spares are usually charged to the profit and loss
      statement as and when consumed. However, if such spares can be used only in
      connection with an item of fixed asset and their use is expected to be irregular, it may be
      appropriate to allocate the total cost on a systematic basis over a period not exceeding
      the useful life of the principal item'. These requirements had given rise to a number of
      interpretations.   The ICAI had, accordingly, issued an Accounting Standard
      Interpretation (ASI 2), Accounting for Machinery Spares. However, the ASI 2 had not
      been included in the notified AS 10. In view of this, the ICAI had also withdrawn this
      ASI based on the Council decision in this regard. Paragraph 8 of revised AS 10 has,
      accordingly, been revised to simplify the accounting for spare parts and stand-by
      equipments on the lines of IAS 16.


                                               25
6.   Paragraph 9 of the Standard has been amended to specifically recognise `unit of measure'
     approach, for instance, for recognition of certain expenditure incurred on construction of
     assets not owned by an enterprise during the construction stage of a project as a part of
     the aggregate assets constructed in a project and apportioned to the other assets
     recognised in the balance sheet. However, this does not mean that in all situations an
     entity would be able to take the benefit of `unit of measure' to capitalise any type of
     expenditure on assets not owned by an entity over which it does not have control. For
     example, a road constructed by an entity on government land which is not owned by the
     enterprise and over which it does not have exclusive control as the road can be used by
     general public, can be capitalised as a part of the project cost if such a road is constructed
     to facilitate the construction of the manufacturing plant itself because this cost is
     considered necessary for the project to be capable of operating in the manner intended.
     However, in case another road is constructed by the same plant after commencement of
     operations which is neither owned nor controlled by the entity, it would not be eligible
     for capitalisation either as a part of the project or as an individual asset.


7.   Paragraph 11 has been added to explain the new aspects covered in the definition of
     `property, plant and equipment', particularly, with regard to the assets held for use for
     administrative purposes and assets acquired for safety and environmental purposes.


8.   The revised AS 10 is based on the component approach. Under this approach, 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 is depreciated separately (paragraph 45). As a corollary, cost of
     replacing such parts is capitalised, if recognition criteria are met with consequent
     derecognition of carrying amount of the replaced part. The cost of replacing those parts
     which have not been depreciated separately is also capitalised with the consequent
     derecognition of the replaced parts. If it is not practicable for an entity to determine the
     carrying amount of the replaced part, it 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 (paragraphs 13 and 15).




                                                26
      AS 10 (1985), however, does not mandatorily require full adoption of the component
      approach. It recognises the said approach in only one paragraph by stating that
      accounting for a tangible fixed asset may be improved if total cost thereof is allocated to
      its various parts. Apart from this, neither AS 10 (1985) nor AS 6 (1994) deals with the
      aspects such as separate depreciation of components, capitalising the cost of replacement,
      etc.


9.    The revised AS 10 requires the cost of major inspection costs to be capitalised with the
      consequent derecognition of any remaining carrying amount of the cost of the previous
      inspection(paragraph 14). AS 10 (1985) does not deal with this aspect.


10.   Accounting Standard 29, `Provisions: Contingent Liabilities and Contingent Assets',
      was issued as a revision of AS 4. This Standard, inter alia, requires creation of a
      provision in respect of costs of dismantling and removing an item of fixed asset and
      restoring the site at which it is located, the obligation in respect of which an entity incurs
      either when the item of fixed asset is acquired or as a consequence of having used the
      item during a particular period. While AS 29 requires creation of a provision, there is no
      corresponding treatment prescribed as to where the debit arising on the creation of the
      provision should go. In this regard, amendments have been made to indicate that where
      such a provision is made on creation of a fixed asset, the same should form part of the
      cost of the asset and where provision is made as a consequence of having used the item
      to produce inventories during that period, the same should be considered as the part of
      inventories (paragraph 19).


11.   With regard to self-constructed assets, the revised AS 10, on the lines of IAS 16,
      specifically states that the cost of abnormal amounts of wasted material, labour, or other
      resources incurred in the construction of an asset is not included in the cost of the assets
      (paragraph 23).

      AS 10 (1985) while dealing with self-constructed fixed assets does not mention the
      same.


12.   The revised AS 10 requires an entity to choose either the cost model or the revaluation
      model as its accounting policy and to apply that policy to an entire class of property



                                               27
      plant and equipment (paragraph 32).          It requires that under revaluation model,
      revaluation be made with reference to the fair value of items of property plant and
      equipment. It also requires that 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.

      AS 10 (1985) recognises revaluation of fixed assets. However, the revaluation approach
      adopted therein is ad hoc in nature, as it does not require the adoption of fair value basis
      as its accounting policy or revaluation of assets with regularity. It also provides an
      option for selection of assets within a class for revaluation on systematic basis.


13.   AS 10 (1985) specifically deals with the fixed assets owned by the entity jointly with
      others. The revised AS 10 does not specifically deal with this aspect as these would
      basically be covered by AS 27 as jointly controlled assets.


14.   On the lines of IAS 16, paragraph 44 of the revised AS 10 provides that the revaluation
      surplus included in owners' interest 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 the 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.

      As compared to the above, neither AS 10 (1985) nor AS 6 (1994) deals with the transfers
      from revaluation surplus. To deal with this aspect, the Institute has issued a Guidance
      Note on Treatment of Reserve Created on Revaluation of Fixed Assets. The Guidance
      Note provides that if a company has transferred the difference between the revalued
      figure and the book value of fixed assets to the `Revaluation Reserve' and has charged
      the additional depreciation related thereto to its profit and loss account, it is possible to
      transfer an amount equivalent to accumulated additional depreciation from the
      revaluation reserve to the profit and loss account or to the general reserve as the



                                              28
      circumstances may permit, provided suitable disclosure is made in the accounts.
      However, the said Guidance Note also recognises that it would be prudent not to charge
      the additional depreciation arising due to revaluation against the revaluation reserve.


15.   On the lines of IAS 16, paragraph 53 of the revised AS 10 requires that change in
      depreciation method should be considered as a change in accounting estimate and treated
      accordingly. In AS 6 (1994), it is considered as a change in accounting policy and
      treated accordingly.

      As a consequence, the revised AS 10 requires that 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. In AS 6 (1994), change in depreciation method can be made only if the adoption
      of the new method is required by statute or for compliance with an accounting standard
      or if it is considered that the change would result in a more appropriate preparation or
      presentation of the financial statements.


16.   On the lines of IAS 16, paragraph 53 of the revised AS 10 requires that the residual
      value and useful life of an asset 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. Under AS 6 (1994), such a
      review is not obligatory as it simply provides that useful life of an asset may be reviewed
      periodically.


17.   Paragraphs 66 -69 have been added to explain the accounting for the situations where
      the cost of a tangible fixed asset undergoes changes subsequent to acquisition or
      construction on account of changes in liabilities, price adjustments, changes in duties,
      changes in existing liabilities for dismantling, removing, restoration and similar factors.


18.   On the lines of IAS 16, the revised AS 10 requires that compensation from third parties
      for items of property, plant and equipment should be included in the statement of profit



                                              29
      and loss when the compensation becomes receivable (paragraph 70). AS 10(1985) does
      not specifically deal with this aspect.
19.   On the lines of IAS 16, the revised AS 10 specifically provides that gains arising on
      derecognition of an item of property, plant and equipment should not be treated as
      revenue as defined in AS 9. AS 10 (1985) is silent on this aspect(paragraph 75).


20.   The disclosure requirements of the revised AS 10 are significantly elaborate as compared
      to AS 10 (1985)/ AS 6 (1994)(Paragraph 81-87).




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