(This Accounting Standard includes paragraphs set in bold italic type and plain type, which have equal authority. Paragraphs in bold ital...
(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 Accounting Standard should be read in the context of the
General Instructions contained in part A of the Annexure to the Notification.)
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:
(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.
Investment
property, as defined in AS 13, Accounting for Investments, should be accounted for only in accordance with the cost model
prescribed in this standard.
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 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 produce, except for incidental
scrap sales.
The following are not bearer plants:
(i)
plants
cultivated to be harvested as agricultural produce (for example, trees grown
for use as lumber);
(ii)
plants
cultivated to produce agricultural produce when there is more than a remote
likelihood that the entity will also harvest and sell the plant as agricultural
produce, other than as incidental scrap sales (for example, trees that are
cultivated both for their fruit and their lumber); and
(iii)
annual
crops (for example, maize and wheat).
When bearer plants are no longer used to bear
produce they might be cut down and sold as scrap, for example, for use as
firewood. Such incidental scrap sales would not prevent the plant from
satisfying the definition of a bearer plant.
Biological
Asset is a living animal1 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.
1An
Accounting Standard on Agriculture is under formulation, which will, inter
alia, cover accounting for livestock. Till the time, the Accounting Standard on
Agriculture is issued, accounting for livestock meeting the definition of
Property, Plant and Equipment, will be covered as per AS 10 (Revised),
Property, Plant and Equipment.
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 a period
of twelve months.
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 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.
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 for
faults regardless of whether parts of the item are replaced. When each major
inspection is performed, its cost is recognised in the carrying amount of the
item of property, plant and equipment as a replacement if the recognition
criteria are satisfied. Any remaining carrying amount of the cost of the
previous inspection (as distinct from physical parts) is derecognised.
15.
The
derecognition of the carrying amount as stated in paragraphs 13-14 occurs
regardless of whether the cost of the previous part / inspection was identified
in the transaction in which the item was acquired or constructed. If it is not
practicable for an enterprise to determine the carrying amount of the replaced
part/ inspection, it may use the cost of the replacement or the estimated cost
of a future similar inspection as an indication of what the cost of the
replaced part/ existing inspection component was when the item was acquired or
constructed.
Measurement at Recognition
16. An item of property, plant and equipment that
qualifies for recognition as an asset should be measured at its cost.
Elements of Cost
17.
The cost
of an item of property, plant and equipment comprises:
(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, removing the item and restoring
the site on which it is located, referred to as ‘decommissioning, restoration
and similar liabilities’, 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.
(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;
(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.
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.
For the purpose of determining
whether an exchange transaction has commercial substance, the enterprise
-specific value of the portion of operations of the enterprise affected by the
transaction should reflect post-tax cash flows. In certain cases, the result of
these analyses may be clear without an enterprise having to perform detailed
calculations.
28.
The fair
value of an asset is reliably measurable if (a) the variability in the range of
reasonable fair value measurements is not significant for that asset or (b) the
probabilities of the various estimates within the range can be reasonably
assessed and used when measuring fair value. If an enterprise is able to
measure reliably the fair value of either the asset received or the asset given
up, then the fair value of the asset given up is used to measure the cost of
the asset received unless the fair value of the asset received is more clearly
evident.
29.
Where
several items of property, plant and equipment are purchased for a consolidated
price, the consideration is apportioned to the various items on the basis of
their respective fair values at the date of acquisition. In case the fair values
of the items acquired cannot be measured reliably, these values are estimated
on a fair basis as determined by competent valuers.
30.
The cost
of an item of property, plant and equipment held by a lessee under a finance
lease is determined in accordance with AS 19, Leases.
31.
The
carrying amount of an item of property, plant and equipment may be reduced by
government grants in accordance with AS 12, Accounting for Government Grants.
Measurement after Recognition
32. An
enterprise should choose either the cost model in paragraph 33 or the
revaluation model in paragraph 34 as its accounting policy and should apply
that policy to an entire class of property, plant and equipment.
33. After
recognition as an asset, an item of property, plant and equipment should be
carried at its cost less any accumulated depreciation and any accumulated
impairment losses.
Revaluation Model
34. After
recognition as an asset, an item of property, plant and equipment whose fair
value can be measured reliably should be carried at a revalued amount, being
its fair value at the date of the revaluation less any subsequent accumulated
depreciation and subsequent accumulated impairment losses. Revaluations should
be made with sufficient regularity to ensure that the carrying amount does not
differ materially from that which would be determined using fair value at the
balance sheet date.
35.
The fair
value of items of property, plant and equipment is usually determined from
market-based evidence by appraisal that is normally undertaken by
professionally qualified valuers.
36.
If there
is no market-based evidence of fair value because of the specialised nature of
the item of property, plant and equipment and the item is rarely sold, except
as part of a continuing business, an enterprise may need to estimate fair value
using an income approach (for example, based on discounted cash flow
projections) or a depreciated replacement cost approach which aims at making a
realistic estimate of the current cost of acquiring or constructing an item
that has the same service potential as the existing item.
37.
The
frequency of revaluations depends upon the changes in fair values of the items
of property, plant and equipment being revalued. When the fair value of a
revalued asset differs materially from its carrying amount, a further
revaluation is required. Some items of property, plant and equipment experience
significant and volatile changes in fair value, thus necessitating annual
revaluation. Such frequent revaluations are unnecessary for items of property,
plant and equipment with only insignificant changes in fair value. Instead, it
may be necessary to revalue the item only every three or five years.
38.
When an
item of property, plant and equipment is revalued, the carrying amount of that
asset is adjusted to the revalued amount. At the date of the revaluation, the
asset is treated in one of the following ways:
(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;
(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.
45. Each part
of an item of property, plant and equipment with a cost that is significant in
relation to the total cost of the item should be depreciated separately.
46.
An
enterprise allocates the amount initially recognised in respect of an item of
property, plant and equipment to its significant parts and depreciates each
such part separately. For example, it may be appropriate to depreciate
separately the airframe and engines of an aircraft, whether owned or subject to
a finance lease.
47.
A
significant part of an item of property, plant and equipment may have a useful
life and a depreciation method that are the same as the useful life and the
depreciation method of another significant part of that same item. Such parts
may be grouped in determining the depreciation charge.
48.
To the
extent that an enterprise depreciates separately some parts of an item of
property, plant and equipment, it also depreciates separately the remainder of
the item. The remainder consists of the parts of the item that are individually
not significant. If an enterprise has varying expectations for these parts,
approximation techniques may be necessary to depreciate the remainder in a
manner that faithfully represents the consumption pattern and/or useful life of
its parts.
49.
An
enterprise may choose to depreciate separately the parts of an item that do not
have a cost that is significant in relation to the total cost of the item.
50. The
depreciation charge for each period should be recognised in the statement of
profit and loss unless it is included in the carrying amount of another asset.
51.
The
depreciation charge for a period is usually recognised in the statement of
profit and loss. However, sometimes, the future economic benefits embodied in
an asset are absorbed in producing other assets. In this case, the depreciation
charge constitutes part of the cost of the other asset and is included in its
carrying amount. For example, the depreciation of manufacturing plant and
equipment is included in the costs of conversion of inventories (see AS 2).
Similarly, the depreciation of property, plant and equipment used for
development activities may be included in the cost of an intangible asset
recognised in accordance with AS 26, Intangible
Assets.
Depreciable Amount and Depreciation Period
52. The
depreciable amount of an asset should be allocated on a systematic basis over
its useful life.
53. The
residual value and the useful life of an asset should be reviewed at least at
each financial year-end and, if expectations differ from previous estimates,
the change(s) should be accounted for as a change in an accounting estimate in
accordance with AS 5, Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies.
54.
Depreciation
is recognised even if the fair value of the asset exceeds its carrying amount,
as long as the asset’s residual value does not exceed its carrying amount.
Repair
55.
The
depreciable amount of an asset is determined after deducting its residual
value.
56.
The
residual value of an asset may increase to an amount equal to or greater than
its carrying amount. If it does, depreciation charge of the asset is zero
unless and until its residual value subsequently decreases to an amount below
its carrying amount.
57.
Depreciation
of an asset begins when it is available for use, i.e., when it is in the location and condition necessary for it to
be capable of operating in the manner intended by management. Depreciation of
an asset ceases at the earlier of the date that the asset is retired from
active use and is held for disposal and the date that the asset is
derecognised. Therefore, depreciation does not cease when the asset becomes
idle or is retired from active use (but not held for disposal) unless the asset
is fully depreciated. However, under usage methods of depreciation, the
depreciation charge can be zero while there is no production.
58.
The
future economic benefits embodied in an asset are consumed by an enterprise
principally through its use. However, other factors, such as technical or
commercial obsolescence and wear and tear while an asset remains idle, often
result in the diminution of the economic benefits that might have been obtained
from the asset. Consequently, all the following factors are considered in
determining the useful life of an asset:
(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. With some
exceptions, such as quarries and sites used for landfill, land has an unlimited
useful life and therefore is not depreciated. Buildings have a limited useful
life and therefore are depreciable assets. An increase in the value of the land
on which a building stands does not affect the determination of the depreciable
amount of the building.
61. If the cost of land includes the costs of site
dismantlement, removal and restoration, that portion of the land asset is
depreciated over the period of benefits obtained by incurring those costs. In
some cases, the land itself may have a limited useful life, in which case it is
depreciated in a manner that reflects the benefits to be derived from it.
Depreciation Method
62. The
depreciation method used should reflect the pattern in which the future
economic benefits of the asset are expected to be consumed by the enterprise.
63. The
depreciation method applied to an asset should be reviewed at least at each
financial year-end and, if there has been a significant change in the expected
pattern of consumption of the future economic benefits embodied in the asset,
the method should be changed to reflect the changed pattern. Such a change
should be accounted for as a change in an accounting estimate in accordance
with AS 5.
64.
A variety
of depreciation methods can be used to allocate the depreciable amount of an
asset on a systematic basis over its useful life. These methods include the
straight-line method, the diminishing balance method and the units of
production method. Straight-line depreciation results in a constant charge over
the useful life if the residual value of the asset does not change. The
diminishing balance method results in a decreasing charge over the useful life.
The units of production method results in a charge based on the expected use or
output. The enterprise selects the method that most closely reflects the
expected pattern of consumption of the future economic benefits embodied in the
asset. That method is applied consistently from period to period unless there
is a change in the expected pattern of consumption of those future economic
benefits or that the method is changed in accordance with the statute to best
reflect the way the asset is consumed
65.
A
depreciation method that is based on revenue that is generated by an activity
that includes the use of an asset is not appropriate. The revenue generated by
an activity that includes the use of an asset generally reflects factors other
than the consumption of the economic benefits of the asset. For example,
revenue is affected by other inputs and processes, selling activities and changes
in sales volumes and prices. The price component of revenue may be affected by
inflation, which has no bearing upon the way in which an asset is consumed.
Changes in Existing Decommissioning, Restoration and Other Liabilities
66. The
cost of property, plant and equipment may undergo changes subsequent to its
acquisition or construction on account of changes in liabilities, price
adjustments, changes in duties, changes in initial estimates of amounts
provided for dismantling, removing, restoration and similar factors and
included in the cost of the asset in accordance with paragraph 16. Such changes
in cost should be accounted for in accordance with paragraphs 67–68 below.
(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.
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
(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 the principles enunciated in AS 9.
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:
(i)
additions;
(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
(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.
An
enterprise is encouraged to disclose the following:
(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;
(d)
the
carrying amount of property, plant and equipment retired from active use and
not held for disposal.
Transitional Provisions
88. Where
an entity has in past recognized an expenditure in the statement of profit and
loss which is eligible to be included as a part of the cost of a project for
construction of property, plant and equipment in accordance with the
requirements of paragraph 9, it may do so retrospectively for such a project.
The effect of such
89. The
requirements of paragraphs 26-28 regarding the initial measurement of an item
of property, plant and equipment acquired in an exchange of assets transaction
should be applied prospectively only to transactions entered into after this
Standard becomes mandatory.
90. On the
date of this Standard becoming mandatory, the spare parts, which hitherto were
being treated as inventory under AS 2, Valuation of Inventories, and are now
required to be capitalised in accordance with the requirements of this
Standard, should be capitalised at their respective carrying amounts. The spare
parts so capitalised should be depreciated over their remaining useful lives
prospectively as per the requirements of this Standard.
91. The
requirements of paragraph 32 and paragraphs 34 – 44 regarding the revaluation
model should be applied prospectively. In case, on the date of this Standard
becoming mandatory, an enterprise does not adopt the revaluation model as its
accounting policy but the carrying amount of item(s) of property, plant and
equipment reflects any previous revaluation it should adjust the amount
outstanding in the revaluation reserve against the carrying amount of that
item. However, the carrying amount of that item should never be less than
residual value. Any excess of the amount outstanding as revaluation reserve
over the carrying amount of that item should be adjusted in revenue reserves.
This is applicable from 01.04.2017
Amendment in Other accounting standards
Notification
AS 2, Valuation of Inventories
AS 4, Contingencies and Events Occurring After the Balance Sheet Date
AS 13, Accounting for Investments
AS 14, Accounting for Amalgamations
AS 21, Consolidated Financial Statements
AS 29, Provisions, Contingent Liabilities and Contingent Assets
This is applicable from 01.04.2017
Amendment in Other accounting standards
COMMENTS