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AS 10 (Revised)- Property, Plant And Equipment

Published in: Accountancy
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  • Amal P

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The Companies (Accounting Standards) Amendment Rules, 2016 has withdrawn the existing AS 6 and replaced the AS 10 with a new AS which is purely based on IAS 16. Lets have a brief look on it

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    ASIO (Revised) Property, Plant and Equipment PREPARED BY: AMAL PAUL
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    Why a revised standard is required? Even though Ind AS implementation is in track, MCA has clarified that Ind AS needs to be followed by Large enterprises whereas Small and Medium sized enterprises will continue to adopt the Existing AS with some modifications. As a first step towards the modification of existing AS, on 30th March, 2016, MCA notified Companies (Accounting Standards) Amendment Rules, 2016 which revised AS 10 with a new standard which is similar to IAS/IFRS. PREPARED BY: AMAL PAUL
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    What are the changes in Amendment Rules, 2016? Revision of AS 2, AS4, AS 13, AS14, AS21 and AS29. Removal of AS6 on Depreciation Accounting. Introduction of a completely new AS 10 (Revised) 'Property, plant and equipment' in place of AS IO- 'Accounting for fixed assets'. PREPARED BY: AMAL PAUL
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    Objective of the standard The objective of this Standard is to prescribe the accounting treatment for property, plant and equipment. Principal issues in accounting for property, plant and equipment are; Recognition of the asset. The determination of their carrying amounts. The charges of depreciation. Impairment losses to be recognized in relation to the asset. PREPARED BY: AMAL PAUL
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    Scope of standard This Standard should be applied in accounting for property, plant and equipment except when another Accounting Standard requires or permits a different accounting treatment. PREPARED BY: AMAL PAUL
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    Scope of standard This standard does not apply to: Biological assets related to agricultural activity other than bearer plants. Wasting assets including mineral rights, expenditure on the exploration for and extraction of minerals, oils, natural gas and similar non- regenerative resources. PREPARED BY: AMAL PAUL
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    Definitions Property, Plant and Equipment Property, plant and equipment are tangible items that: a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and b) are expected to be used during more than a period of twelve months. Bearer Plants Bearer plant is a plant that a) is used in the production or supply of agricultural produce; b) is expected to bear produce for more than a period of twelve months; and c) has a remote likelihood of being sold as agricultural produc , except PREPAR D }AUL or Incidental scrap sales.
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    Recognition Criteria The cost of an item of property, plant and equipment should be recognised as an asset if, and only if: it is probable that future economic benefits associated a) with the item will flow to the enterprise and Cost of the item can be measured reliably. b) PREPARED BY: AMAL PAUL
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    Recognition of Spare parts and stand-by equipment If the recognition criteria is met If recognition criteria is not satisfied PREPARED BY: AMAL PAUL ccounted as per AS 10 (Revised) Accounted as per AS 2 'Valuation for Inventories
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    Measurement at Recognition An item of property, plant and equipment that qualifies for recognition as an asset should be measured at its cost. The cost of PPE includes; 1. 2, Initial Cost: cost incurred initially to acquire or construct the PPE Subsequent Cost: costs incurred subsequently to add to, replace part of, or service it. PREPARED BY: AMAL PAUL
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    Elements of Cost The cost of PPE comprises; Its purchase price, including import duties and non — refundable purchase taxes, , after deducting trade discounts and rebates. Any costs directly attributable to bringing the asset to the location and condition The initial estimate of decommissioning, restoration and similar liabilities. PREPARED BY: AMAL PAUL
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    Examples of directly attributable cost Costs of employee benefits arising directly from the construction or acquisition of the PPE Costs of site preparation Initial delivery and handling costs Installation and assembly costs Costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced and professional fees. PREPARED BY: AMAL PAUL
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    Costs not to be capitalized costs of opening a new facility or business, such as, inauguration costs costs of introducing a new product or service( including costs of advertising and promotional activities) costs of conducting business in a new location or with a new class of customer (including costs of staff training) and administration and other general overhead costs PREPARED BY: AMAL PAUL
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    Self Constructed Assets Cost of Self-constructed Asset: Same principles as for an acquired asset. The cost of the asset is usually the same as the cost of constructing an asset for sale. Any internal profits are eliminated in arriving at such costs. The cost of abnormal amounts of wasted material, labour, or other resources incurred in self-constructing an asset is not included in the cost Any borrowing cost which can be capitalized can be included in the cost of PPE. PREPARED BY: AMAL PAUL
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    Measurement after Recognition An enterprise should choose either the cost model or the revaluation model as its accounting policy and should apply that policy to an entire class of property, plant and equipment. Cost Model: After recognition as an asset, an item ofPPE should be carried at its cost less any accumulated depreciation and any accumulated impairment losses. Revaluation Model: After recognition as an asset, an item of PPE whose fair value can be measured reliably should be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subs uent accumulatedlimpairment losses.
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    Revaluation Model If an Asset's carrying amount is increased as a result of revaluation; the increase should be recognised and accumulated in equity unde the heading of revaluation surplus. the increase should be recognised in the profit and loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in the profit and loss account. If an Asset's carrying amount is decreased as a result of revaluation; the decrease should be recognised in the profit and loss. 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 oft a asset. PREPARED BY: AMAL PAUL
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    DEPRECIATION Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. Component cost approach is to be followed. i.e., Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item should be depreciated separately. PREPARED BY: AMAL PAUL
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    Beginning & Cessation of Depreciation Beginning 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. PREPARED BY: AMAL PAUL Cessation 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.
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    Factors to be considered while determining useful life i. ii. iii. iv. expected usage of the asset expected physical wear and tear technical or commercial obsolescence arising from changes or improvements in production legal or similar limits on the use of the asset, such as the expiry dates of related leases. PREPARED BY: AMAL PAUL
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    Methods of Depreciation The depreciation method used should reflect the pattern in which the future economic benefits of the asset are expected to be consumed by the enterprise. The depreciation methods given in AS itself are; Straight-line method a) The diminishing balance method b) The units of production method c) PREPARED BY: AMAL PAUL
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    Review of Residual Value, Useful life & Method of Depreciation AS 10 (Revised) required that the residual value, useful life and metho of depreciation used should be reviewed at least at each financial year. In case of method of depreciation, 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. In case of residual value and useful life, , if expectations differ from previous estimates, the change(s) should be accounted for as a hange in Ranaccounting estimate in accordance with AS 5.
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    IMPAIRMENT An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. To determine whether an item of property, plant and equipment is impaired, an enterprise applies AS 28, Impairment of Assets. 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.
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    Retirements 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. PREPARED BY: AMAL PAUL
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    DERECOGNITION The carrying amount of an item of property, plant and equipment should be derecognised on disposal; or when no future economic benefits are expected from its use or disposal. 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. 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 he carrying amount of the item. PREPARED BY: AMAL PAUL
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    Important Disclosure Requirements The financial statements should disclose, for each class of property, plant and equipment: The measurement bases (i.e., cost model or revaluation model) used for determining the gross carrying amount. The depreciation methods used. The useful lives or the depreciation rates used. The gross carrying amount and the accumulated depreciation (aggregated with accumulated impairme losses) at the beginning and end of the period. PREPARED BY: AMAL PAUL
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    Continues.. A reconciliation of the carrying amount at the beginning and end of the period showing: i. ii. 111. IV. VI. Vil. Vill. additions; assets retired from active use and held for disposal; acquisitions through business combinations , increases or decreases resulting from revaluations and from impairment losses recognised or reversed directly in revaluation surplus in accordance with AS 28; impairment losses recognised in the statement of profit and loss in accordance with AS 28; impairment losses reversed in the statement of profit and loss in accordance with AS 28; depreciation; the net exchange differences arising on the translation of the financial statements of a non-integral foreign operation in accordance with AS Il, The Effects of Changes in Foreign Exchang Rates; and bpnghanges.
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    Continues.. The financial statements should also disclose: the existence and amounts of restrictions on title, and property, plant and equipment pledged as security for liabilities; the amount of expenditure recognised in the carrying amount of an item of property, plant and equipment in the course of its construction; the amount of contractual commitments for the acquisition of property, plant and equipment; 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 the amount of assets retired from active use and held for disposal. PREPARED BY: AMAL PAUL
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    Continues.. If items of property, plant and equipment are stated at revalue amounts, the following should be disclosed: the effective date of the revaluation; whether an independent valuer was involved; the methods and significant assumptions applied in estimating fair values of the items; 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 the revaluation surplus, indicating the change for the lod and PREPARED BY: AMAL PAUL any restrictions on the distribution of the balanc o shareholders.
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    Other disclosure requirements In accordance with AS 5, an enterprise discloses the nature an 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: residual values; a) the estimated costs of dismantling, removing or restoring items b) of property, plant and equipment; useful lives; and c) depreciation methods. d) Disclosure regarding; a) PREPARE Y: depreciation, whether recognised in the statement of profit and loss or as a part of the cost of other assets, during a perio , and Aqpgyypulated depreciation at the end of the period.
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    Comparison of AS6 & ASIO with ASI 0(Rev'sed) ASIO (Revised) ASIO (Revised) does not exclude real estate developer from its scope and clearly makes the standard applicable to bearer plants (e.g. Rubber trees, grape Wine). In addition to definition of PPE, it specifically gives a recognition criteria for recognizing an item of PPE. ASIO (Revised) requires an entity to choose either the cost method or the revaluation method as its accounting policy and to apply that policy to an entire class of PPE. PREPARED BY: AMAL PAUL ASIO had specifically excluded accounting for real estate developers from the scope of the standard whereas new standard does not exclude such developers from its scope. AS 10 only gives the definition of fixed asset and not gives any recognition criteria. AS 10 does not give any measurement base such as cost or revaluation model or choose any one of such method a accounting policy.
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    ASIO (Revised) ASIO (Revised) does not specifically deal with jointly owned assets. AS 10(Revised) requires that the residual value and useful life Of an asset be at the end of each financial year. ASIO (Revised) requires that the depreciation method applied should be reviewed at least at the end of each financial year and pattern and the change should be treated as a change in accounting estimate. Items of PPE retired from active use and held for disposal should be stated at the lower of their carrying PREPAamount and net realisable value. AS 6 & ASIO Existing AS specifically deals with fixed assets owned jointl with others. Under AS 6, such a review is not obligatory since it simply provides that useful asset of an asset may be reviewed periodically. AS6 recognises change in depreciation method as a change in accounting policy. Method can be changed only if there is a change in AS or statute or for better preparation and presentation of financial statements. AS 10 does not contain ny such provision.
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    PREPARED BY: AMAL

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