Property Plant and Equipment also referred to as fixed assets are tangible items held by an entity for use in production or supply of goods and services inventory rental to others or for administrative purposes that are expected to be used over more than one financial period and are not held for sale in the ordinary course of business Examples include land buildings plant and machinery furniture fittings and office equipment These are distinguishable from intangible assets which are covered under a different accounting standard.
An entity classifies an asset as PPE based on its nature and intended use. It must be tangible, expected to yield future economic benefits beyond a single period, and not intended for resale. An item still under construction may also qualify as PPE once it meets use conditions.. Completion and readiness for intended use determine recognition timing.
Objective of Accounting Standard 10
The primary objective of this accounting standard is to guide entities in recognizing measuring and accounting PPE consistently and reliably This includes determining when to recognize an asset how to measure its initial cost and carrying amount and how to allocate depreciation charges and account for impairment losses The standard aims to ensure reliability relevance and comparability in financial reporting relating to these assets It helps stakeholders understand how much an entity invests in PPE how these assets consume economic benefits over time and whether their carrying values remain recoverable..
Scope of the Standard
The standard applies to accounting for PPE except in situations where another standard provides alternative treatment It excludes biological assets related to agricultural activity such as living plants or animals intended for harvest for sale However bearer plants which are living plants used in production over more than one period are included from the date they are ready for intended use Wasting assets such as mineral rights exploration and extraction costs for oil gas and other non‑regenerative natural resources are excluded Nevertheless PPE used to develop or maintain those excluded assets falls within the scope of this standard Investment property defined as land or buildings not occupied by the entity is not considered PPE and is reported under different accounting treatments within this same standard.
Understanding scope helps determine when AS 10 is applicable and when other standards like those on biological, agricultural produce, wasted assets, or investment property take precedence..
Definitions Related to Biological Assets: Agricultural Activity, Agricultural Produce, and Bearer Plant
The standard provides clear definitions to distinguish between various types of living and cultivated assets A biological asset refers to a living animal or plant that is central to agricultural activity Agricultural activity involves the management of biological transformation and harvest of such assets into produce or additional biological assets Agricultural produce is the harvested output from biological assets Bearer plants are defined as plants used in production or supply of agricultural produce expected to bear produce for more than twelve months and are not intended for sale except for incidental scrap disposal Certain types of assets fall outside the bearer plant definition such as plants grown for lumber annual crops or those cultivated both for fruit and timber A fruit‑bearing tree such as mango is considered a bearer plant and covered by the standard once it is capable of yielding fruit in multiple periods whereas the harvested fruit is treated as agricultural produce and is outside the standard’s scope including wheat crops which are not bearer plants..
Recognition of Assets
An item qualifies as PPE and is recognized only when it meets two criteria First it is probable that future economic benefits associated with the asset will flow to the entity Second the cost of the item can be measured reliably Probability of future economic benefits is assessed based on evidence available at the date of initial recognition typically the purchase date The entity must be assured it assumes both rewards and risks of ownership before recognition Asset recognition does not apply before that moment For example when machinery is purchased and ownership risk passes to the entity future economic benefits in the form of production capability are reasonably certain the cost is known from an invoice and the item qualifies as PPE Spare parts intended for ongoing consumption are usually treated as inventory expensed when consumed Major spare parts expected to be used over more than one period that are not readily replaceable in the market are capitalized as part of PPE and not expensed immediately Aggregation policies for individually insignificant items may vary but must align with recognition principles A company may adopt a threshold to expense assets below a certain cost to avoid administrative burden although the recognition criteria still apply.
Safety and Environmental Equipment
Equipment acquired to ensure safety or meet environmental regulations may not directly enhance production but is essential for deriving economic benefits from other PPE Such equipment should be recognized as PPE because it enables continued and lawful usage of other assets For example a chemical firm installing pollution control systems or safety measures enables safe use and sale of chemicals Without such expenditure the entity could not operate its core assets The carrying amount of such items and related PPE must be reviewed for impairment under applicable impairment accounting rules.
Measurement After Recognition
Once an item of property, plant, and equipment has been recognized as an asset, it shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses. This is known as the cost model. The entity must continue to follow this model for all its property, plant, and equipment unless otherwise stated. The cost of an asset 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 necessary for it to be capable of operating in the manner intended by management, and the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located. Costs that are not directly attributable to bringing the asset to the location and condition necessary for it to be used, such as costs of opening a new facility, introducing a new product or service, conducting business in a new location, or administrative and other general overheads, should not be included in the cost of the asset.
Subsequent Costs
Costs incurred after the asset has been brought to its working condition should normally be charged to the profit and loss account. However, subsequent costs may be capitalized if they improve the condition of the asset beyond its originally assessed standard of performance. These may include major inspections, overhauls, or replacements of parts. If the cost of a replacement meets the recognition criteria, the carrying amount of the parts replaced is derecognized. The cost of the replacement is added to the carrying amount of the asset. If the cost of the inspection is capitalized, then any remaining carrying amount of the cost of the previous inspection should be derecognized.
Depreciation
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount is the cost of the asset or other amount substituted for cost, less its residual value. Each part of an item of property, plat,, and equipment with a cost that is significant concerning the total cost of the item should be depreciated separately. The depreciation method used should reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. If that pattern cannot be determined reliably, the straight-line method should be used. The depreciation charge for each period should be recognized in the statement of profit and loss unless it is included in the carrying amount of another asset. 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 should be accounted for as a change in an accounting estimate.
Depreciation Methods
Common depreciation methods include the straight-line method, the diminishing balance method, and the units of production method. The straight-line method results in a constant charge over the useful life of the asset. The diminishing balance method results in a decreasing charge over the useful life. The units of production method result in a charge based on the expected use or output of the asset. The chosen method must reflect the pattern in which the asset’s economic benefits are expected to be consumed. An entity is required to disclose the depreciation methods used, the useful lives or the depreciation rates used, the gross carrying amount and the accumulated depreciation at the beginning and end of the period, and a reconciliation of the carrying amount at the beginning and end of the period showing additions, disposals, acquisitions through business combinations, and other changes.
Impairment
An asset is said to be impaired when its carrying amount exceeds its recoverable amount. The recoverable amount is the higher of its fair value less costs of disposal and its value in use. Impairment losses should be recognized in the profit and loss account unless the asset is carried at a revalued amount by another accounting standard, in which case the impairment loss is treated as a revaluation decrease. Reversal of impairment losses should be recognized immediately in the profit and loss account to the extent that it was previously recognized. The carrying amount after reversal should not exceed the carrying amount that would have been determined had no impairment loss been recognized.
Derecognition
The carrying amount of an item of property, plant ,and equipment shall be derecognized on disposal or when no future economic benefits are expected from its use or disposal. The gain or loss arising from the derecognition should be included in the profit and loss account when the item is derecognized. The gain or loss arising from the derecognition is calculated as the difference between the net disposal proceeds, if any, and the carrying amount of the item. The proceeds from the sale of a previously held asset should be accounted for as income in the profit and loss account unless a standard requires otherwise. The date of disposal is the date on which the recipient obtains control of the asset by the principles laid out under the revenue recognition standards.
Disclosure Requirements
Entities must disclose for each class of property, plant and equipment the measurement bases used for determining the gross carrying amount, the depreciation methods used, the useful lives or depreciation rates used, the gross carrying amount and the accumulated depreciation at the beginning and end of the period, a reconciliation of the carrying amount at the beginning and end of the period showing additions, disposals, acquisitions through business combinations, revaluation increases or decreases, impairment losses recognized or reversed in profit or loss, depreciation, and other changes. If items of property, plant and equipment are stated at revalued amounts, the date of the revaluation, whether an independent valuer was involved, the methods and significant assumptions applied in estimating the items’ fair values, the extent to which the items’ fair values were determined directly by reference to observable prices or recent market transactions, and the revaluation surplus including changes during the period and any restrictions on the distribution of the balance to shareholders should be disclosed.
Component Accounting
Component accounting requires that significant parts of an asset be depreciated separately if they have different useful lives or provide benefits in a different pattern. This approach ensures that the depreciation expense more accurately reflects the consumption of the asset’s economic benefits. For example, in the case of an aircraft, engines and seats may be depreciated separately if they have different useful lives. Identifying components may require judgment and analysis of the asset’s structure and operation. Replacement of components should be treated as a new asset, and the replaced part should be derecognized from the books. This leads to more accurate accounting and reporting of the asset base and expenses of the entity.
Major Inspection and Overhaul Costs
Certain assets require major inspections or overhauls at regular intervals. These costs may be capitalized if they meet the recognition criteria. For instance, aircraft require inspection after a certain number of flight hours. These inspections ensure that the asset can continue to operate effectively. If the cost of the inspection is capitalized, any remaining carrying amount of the cost of the previous inspection is derecognized. This ensures that the carrying amount of the asset reflects the condition of the asset and the capitalized costs represent the future economic benefits.
Change in Estimated Useful Life
When there is a change in the expected useful life of an asset, it affects the depreciation expense. Such a change should be treated as a change in accounting estimate and should be applied prospectively. For instance, if an asset’s useful life is extended due to better maintenance practices or reduced usage, the depreciation for the remaining life will be adjusted accordingly. The new estimate does not require a restatement of prior periods. It only affects the current and future depreciation charges. Similarly, if the useful life is reduced due to faster wear and tear, the depreciation expense will increase for the remaining life.
Cost of Major Spare Parts
Major spare parts and stand-by equipment qualify as property, plant and equipment when an entity expects to use them during more than one period. These parts are depreciated over the useful life of the main asset or their own useful life, whichever is shorter. Items that do not meet the recognition criteria of AS 10 should be treated as inventory and expensed when consumed. The distinction between inventory and property, plant, and equipment depends on the usage and expected economic benefits. Capitalizing major spare parts ensures that the asset base is correctly represented and expenses are recognized in the period in which the benefits are consumed.
Transition Provisions
When an entity adopts AS 10 for the first time, it may need to adjust the carrying amount of its property, plant, and equipment to conform to the standard. This may involve separating components, identifying previously capitalized costs that are not directly attributable, or capitalizing costs that were previously expensed. Any adjustment required upon transition should be accounted for by the applicable standard on accounting policies, changes in accounting estimates, and errors. The objective is to ensure that the financial statements reflect the correct carrying amounts and depreciation charges from the date of transition.
Depreciation of Property, Plant and Equipment
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. It represents the wear and tear, usage, passage of time, or obsolescence of property, plant, and equipment. Under AS 10, depreciation is charged on each component of property, plant and equipment unless it is insignificant about the total cost of the item.
The depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. Depreciation begins when the asset is available for use and continues until the asset is derecognised or classified as held for sale. The depreciable amount of an asset is allocated over its useful life in a manner that reflects the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.
Factors Affecting Depreciation
Depreciation is influenced by several factors. These include the cost of the asset, its estimated residual value, and its estimated useful life. The useful life of an asset is determined by the expected usage of the asset, expected physical wear and tear, technical or commercial obsolescence, and legal or similar limits on the use of the asset.
Residual value is the estimated amount that an entity would currently obtain from the disposal of the asset after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. If expectations differ from previous estimates, the change is accounted for as a change in an accounting estimate by AS 5.
Methods of Depreciation
The depreciation method used reflects the pattern in which the asset’s future economic benefits are expected to be consumed. The method adopted is reviewed at least at each financial year-end, and if there is a significant change in the expected pattern of consumption, the method is changed to reflect the changed pattern. Such a change is accounted for as a change in an accounting estimate.
Common depreciation methods include the straight-line method, the diminishing balance method, and the units of production method. The straight-line method results in a constant charge over the useful life of the asset. The diminishing balance method results in a decreasing charge over the useful life of the asset. The units of production method result in a charge based on the expected use or output.
Component Depreciation
Where an item of property, plant, and equipment comprises individual parts with different useful lives, the cost of the item is allocated to each part, and each part is depreciated separately. This is known as component depreciation. For example, an aircraft’s airframe and engines may be depreciated separately if they have different useful lives.
Component depreciation provides a more accurate picture of the consumption of the economic benefits of the asset. It ensures that each part of the asset is depreciated based on its own useful life. It also facilitates more accurate maintenance and replacement decisions.
Review of Useful Life and Residual Value
At least at each financial year-end, the useful life and residual value of an asset are reviewed. If expectations differ from previous estimates, the change is accounted for as a change in accounting estimate by AS 5. Changes in estimates are applied prospectively in the financial statements.
Revising the useful life of an asset may result in a higher or lower depreciation charge in future periods. Similarly, changes in residual value affect the depreciable amount and hence the future depreciation charge. It is important for entities to base such estimates on the most recent information available and to document the rationale for changes.
Impairment of Property, Plant, and Equipment
An asset is impaired when its carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s net selling price and its value in use. An impairment loss is recognised in the statement of profit and loss unless the asset is carried at a revalued amount, in which case the loss is treated as a revaluation decrease.
AS 28, which deals with impairment of assets, guides the recognition and measurement of impairment losses. When there is an indication of impairment, the entity must assess the recoverable amount of the asset. Indicators of impairment include significant declines in market value, changes in technology, adverse economic changes, and evidence of obsolescence.
Reversal of Impairment Losses
An impairment loss recognised in prior periods is reversed if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. The carrying amount of the asset is increased to its revised recoverable amount, but this amount cannot exceed the carrying amount that would have been determined had no impairment loss been recognised.
Reversal of impairment losses is recognised in the profit and loss account, unless the asset is carried at a revalued amount, in which case the reversal is treated as a revaluation increase. The revised carrying amount forms the new depreciable amount and is depreciated over the remaining useful life of the asset.
Derecognition of Property, Plant and Equipment
An item of property, plant and equipment is derecognised on disposal or when no future economic benefits are expected from its use or disposal. The gain or loss arising on derecognition is calculated as the difference between the net disposal proceeds and the carrying amount of the asset. It is recognised in the statement of profit and loss.
Disposal can occur through sale, scrapping, exchange, or other means. If the consideration is not received fully in cash, the fair value of the consideration is determined. In the case of scrapping or loss of asset due to accident or natural disaster, the net recoverable amount (if any) is considered.
Presentation and Disclosure
The financial statements should disclose for each class of property, plant and equipment the measurement bases used for determining the gross carrying amount, the depreciation methods used, the useful lives or depreciation rates used, the gross carrying amount and accumulated depreciation at the beginning and end of the period, and a reconciliation of the carrying amount at the beginning and end of the period showing additions, disposals, acquisitions, revaluations, impairment losses, reversals, and depreciation.
If items of property, plant and equipment are stated at revalued amounts, the following should also be disclosed: the effective date of the revaluation, whether an independent valuer was involved, the methods and significant assumptions applied in estimating the revalued amounts, the extent to which fair values were determined directly or by other means, and the revaluation surplus, indicating changes during the period and any restrictions on the distribution of the balance to shareholders.
Transitional Provisions
On the first application of AS 10, an entity should apply the standard retrospectively by AS 5 unless impracticable. If retrospective application is impracticable, the entity may adjust the carrying amounts of the assets and liabilities to reflect the new standard as of the beginning of the earliest period for which retrospective application is practicable.
Entities transitioning to AS 10 from earlier versions may face challenges in identifying and valuing individual components for component depreciation or in reassessing useful lives and residual values. Entities should apply professional judgement and consider expert advice where necessary.
Practical Application of AS 10 in Industry
In manufacturing industries, AS 10 plays a critical role in accounting for plant and machinery, factory buildings, tools and dies, and assembly lines. The identification of significant components, estimation of useful life, and assessment of impairment are essential for accurate reporting.
In infrastructure projects, entities invest heavily in roads, bridges, pipelines, and heavy equipment. These assets typically have long lives, and componentisation is vital. For example, road surfacing and underlying structure may have different lives and should be depreciated separately.
In the hospitality sector, property, plans, nd equipment includebuildings, furnishings, and kitchen equipment. Useful lives of these assets vary significantly, and regular review is essential to ensure accuracy of depreciation charges and impairment assessments.
Common Mistakes and Challenges
Entities often overlook component depreciation, which leads to inaccurate estimation of depreciation charges. Many entities use standard rates without reviewing useful life annually, resulting in outdated assumptions. Incorrect classification of assets as repairs rather than capital expenditure is also common.
There may be confusion between capital and revenue expenditure, especially in cases of significant repairs or upgrades. Proper documentation and technical assessment are needed to distinguish between the two. Misclassification can distort financial statements and tax liabilities.
Non-compliance with disclosure requirements is another challenge. Entities must ensure that all required disclosures are made clearly and accurately. Failure to do so may lead to regulatory scrutiny or misinterpretation by stakeholders.
Revaluation Model and Revaluations
An entity may adopt the revaluation model for assets measured under this standard provided fair value can be measured reliably. Under the revaluation mode, the asset is carried at its revalued aamountntbeing fair value at the date of revaluation less any subsequent accumulated depreciation and impairment losses. Revaluations should be performed with sufficient regularity to ensure the carrying amount does not differ materially from fair value. If fair value changes significantly,, then revaluation is required. Revaluations may be carried out on a class of assets or individual assets within a class, provided the revaluations are completed consistently and promptly to maintain up-to-date values. When revaluing accumulated depreciation may be restated proportionately to the change in gross carrying amount or eliminated against the gross carrying amount, and the net carrying amount adjusted to the revalueamountoun whichever method is applied consistently.
Accounting for Revaluation Increases and Decreases
When an asset is revalued upward,,he increase should be credited directly to owners’ equity under revaluation surplus unless it reverses a previous revaluation decrease recognized in profit and loss, in which case the increase is recognized in profit and loss to the extent of the reversal. When an asset is revalued downward, the decrease should be recognized as an expense unless it offsets a previous surplus in which case it is debited against revaluation surplus to the extent the surplus is available and any excess is recognized in profit and loss. Revaluation surplus may be transferred to retained earnings either on disposal of the asset or progressively as the asset is used via depreciation amount representing the difference between depreciation on revalued carrying amount and depreciation on original cost of the asset transferred directly to retained earnings and not through profit or loss.
Disclosure Relating to Revalued Assets
Entities using the revaluation model must disclose the date of revaluation, whether independent valuers were involved, the methods and significant assumptions used to estimate fair values, the extent to which fair values were determined using observable market data, the revaluation surplus, including movements during the period, and any restrictions on distribution of the surplus. Entities should show reconciliations of movements in the revaluation surplus at the beginning and end of the period.
Changes in Decommissioning and Restoration Liabilities
Assets that require dismantling or restoration obligations may change in those liabilities over time due to changes in estimates, discount rates, laws, or site conditions. If the asset is measured under the cost model, changes in the liability should be added to or deducted from the carrying amount of the related asset in the current period. Amount deducted should not exceed the carrying amount. If the decrease exceeds the carrying amount, the excess should be recognized in profit and loss. If the adjustment increases the liability, the asset’s cost is adjusted accordingly and the asset is reviewed for impairment if indicatively required. If the asset is measured under the revaluation model, the effect of changes in liability is taken first against any revaluation surplus related to that asset; any excess reduction not covered by surplus is recognized in profit and loss. An increase in liability is recognized as an expense or debited against the surplus if available.
Accounting for Exchanges of Assets
When assets are exchanged the acquired asset is measured at the fair value of the asset given up or asset received, whichever is more clearly evident unless the exchange lacks commercial substance or fair values cannot be measured reliably. If an exchange lacks commercial substance or fair values cannot be measured reliably, the acquired asset is measured at the carrying amount of the asset given up. Any difference between fair values and carrying amounts may result in a gain or loss recognized in profit,,nd Judgment is needed to assess whether the transaction has commercial substance, meaning that future cash flows are expected to change as a result of the exchange.
Derecognition and Disposal of Assets
The carrying amount of an asset is derecognized on disposal or when no future economic benefits are expected from its use or disposal. Upoderecognitionn any gain or loss calculated as the difference between net disposal proceeds and carrying amount should be recognized in profit and loss. Proceeds from the disposal of assets previously held should be recorded as income unless another standard requires different treatment. Control is considered transferred when the buyer gains control under relevant principles.
Presentation and Disclosure Requirements
Entities should disclose for each class of property plant and equipment the measurement basis used to determine carrying amounts gross carrying amount,, and accumulated depreciation at the beginning and end of period, depreciation methods useful lives, or depreciation rates used,, and reconciliation of carrying amount showing additions, disposals, revaluations, impairments, depreciation, and other changes. For assets stated at revalued amount, entities must provide additional disclosure of revaluation date, the independent valuer’s involvement methods and assumptions, fair value measurement basis, and movement in revaluation ssurpluss including restrictions on distribution.
Transitional Provisions and First‑time Adoption
When initially applying thstandarddrd,, entities should apply it retrospectively unless impracticable in accordance with the standard on changes in accounting policies and errors. If retrospective application is impracticable,, an entity may restate carrying amounts at the start of the earliest period practicable. Adjustments may be required for componentisation, useful life estimates, recognition of direct costs, capitalization of items previously expensed or derecognition of incorrectly capitalised expenditures. Entities should provide disclosure of transitional adjustments and related effects on financial statements.
Practical Illustrations and Examples
Illustrations under the standard include accounting for self‑constructed assets, exchange of assets,, acquisition of major spare parts and part replacements, overhaul costs, decommissioning provision adjustments, revaluation exercises, and componentisation exercises. Examples include calculating the present value of estimated dismantling cost when included in cost of plant, calculating depreciation charges for different components of an aircraft, carrying separate depreciation for engines and fuselage, accounting for exchange of fixed assets with or without commercial substance, estimating useful life chang, , es reviewing residual values, and recognising impairment or reversal where appropriate.
Common Errors and Issues
Common mistakes in application include failure to apply component accounting leading to overstated carrying amounts and understated depreciation expense using arbitrary depreciation rates without reviewing useful life annually misclassifying revenue expenditure as capital expenditure improper recognition of subsequent costs as assets rather than expenses or vice versa incomplete disclosure especially around revaluation and impairment inconsistent application of policy across asset classes lack of documentation supporting estimates and frequent omission of impairment reversals or recognition when required.
Benefits of Proper Implementation
Appropriate application of the standard ensures transparent and comparable financial reporting about property plant and equipment It provides decision‑useful information to users regarding the nature value remaining service potential and future economic benefits of assets It enables better asset management decisions pricing of products and services capital budgeting and performance analysis It enhances stakeholder confidence in financial information and helps meet regulatory compliance requirements.
Conclusion
Accounting Standard 10 mandates principles for recognition initial measurement subsequent measurement and derecognition of property plant and equipment It allows choice between cost model and revaluation model and demands consistent application across classes of assets Proper application of component accounting depreciation impairment and disclosure enhances relevance and reliability of financial statements It helps entities manage assets effectively to support operations and performance reporting It supports comparability between entities and periods and exceeds minimum requirements of transparency in accounting for fixed assets.