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property, plant, and equipment definition: AS 10 PPE property plant and equipment AS 10 PROPERTY PLANT & EQUIPMENT Definition of PPE They


This is to enable the users of the Financial Statement to understand the investment that is made by the business entity in its property, plant, and equipment and the respective changes made therein. Now we know that Accounting Standard 10 deals with Property, Plant, and Equipment . The basic purpose of this standard is to lay down or specify the accounting treatment for Property, Plant, and Equipment. The number of production or similar units expected to be obtained from the asset by an entity. Recoverable amount is the higher of an assets fair value less costs to sell and its value in use. However, this Standard applies to property, plant and equipment used to develop or maintain the assets described in .

capable of operating

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. Revaluations must be done at regular intervals for ensuring that the carrying amount doesn’t differ much from that which would be determined using the fair value at balance sheet date. An enterprise does not recognize in the carrying amount of an item of property, plant and equipment the costs of the day-to-day servicing of the item.

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Therefore, it becomes necessary to audit the investments or sales of the company in terms of Property, Plant and Equipment. Whatever amount is written on the balance sheet with respect to Property, Plant and Equipment without any adjustment is simply the Gross value of PP&E. Under the head Investment, there is a sub-head of PP&E. Companies that want to scale their business and expand it must make capital investments.

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Any write-down in this regard should be recognized immediately in the statement of profit and loss. 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 judgment based on the experience of the enterprise with similar assets.

3 Cost of self-constructed asset

The restaurant cannot be opened without incurring the construction and remodelling expenditure amounting ₹ 30,00,000 and thus the expenditure should be considered part of the asset. The business entity must use the depreciation method that demonstrates the manner in which the future economic benefits to be derived from an asset are anticipated to be used by the business entity. The revalued amount is nothing but the Fair Value of the item of PPE at the date of revaluation less any subsequent accumulated depreciation as well as impairment losses. A decrease in liability shall be credited directly to revaluation surplus, except that it shall be recognised in profit or loss to the extent it reverses a revaluation deficit w.r.t the related asset. 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 realizable value.

Where an asset’s carrying amount is increased as a result of a revaluation , this gain is normally recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the gain should be recognised in the statement of profit or loss to the extent that it reverses a revaluation decrease of the same asset which had previously been recognised in profit or loss. The cost of a self-constructed asset is determined using the same principles as for an acquired asset. If an entity 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 (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.

Measurement subsequent to initial recognition

Here, administrative purposes include all business purposes other than the production or supply of goods or services or giving PPE on rent to others. The acquisition of property, plant and equipment which does not, directly increases the future economic benefits but may be necessary for an enterprise to obtain the future economic benefits from its other assets. 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. The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services.

If the expected cash flows after the exchange differ from what would have been expected without this occurring, the exchange has commercial substance and is to be accounted for at fair value. A business entity initiates to charge depreciation to an asset only when it is available for use. In other words, assets are depreciated only when they are brought to the location and the condition essential for making the asset operational in the manner in which it is planned by the management. Such a charge allocated in each period to an asset must demonstrate the manner in which the future economic benefits arising from an asset are expected to be utilized by the business entity. Sometimes, 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 it’s carrying amount.

  • 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.
  • For assets bought in exchange for other assets, the real cost is recognized under ICDS 5, with AS 10 allowing the cost base to be determined using the FMV of the item acquired or given up, whichever is appropriate.
  • Rather, these costs are recognised in the statement of profit and loss as incurred.
  • 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 realizable value.
  • If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up.

Other than these, Accounting Standards may require recognition of an item or property, plant, and equipment which will be based on an approach that is different from the Standard. The depreciation expense is calculated by subtracting the residual value of the asset from the cost of the asset and further dividing this difference with the useful life of the asset. As mentioned above, the depreciation amount is nothing but a charge allocated systematically to an asset over its useful life. In such a situation, the items should be grouped together in order to estimate the depreciation amount. Further, AS 10 does not specify any unit of measure for an item of PPE.

The new-restaurant requires significant renovation expenditure. Management expects that the renovations will last for 3 months during which the restaurant will be closed. ICDS 5 specifically excludes Other Taxes that are recoverable from the cost of an acquired tangible fixed asset. Ind AS 16 requires the capitalization of major inspection costs, as well as the de-recognition of any residue carrying the cost of the previous inspection. Further, AS 10 does not specify any unit for measurement for an item of PPE. Thus, the accounting professionals are required to make use of proper judgment to recognize an item as PPE under specific circumstances.

The on the revaluation surplus relating to a previous revaluation gain for this property was $10,000. Review periodically and, if significant, change method to reflect a change in pattern of consumption of future benefits. Account for as a change in accounting estimate and adjust depreciation charge for current and future period. Decrease should be recognized as an expense in profit and loss.

Determining the depreciation charges and the impairment losses in respect of the property, plant, and equipment. Biological assets that are related to agricultural activity else than the bearer plants. Under this method, depreciation charge is estimated based on the number of units produced by an asset. Thus, the business entity initially allocates the cost to each significant part of an item of PPE and depreciates each part separately.

For example, the useful life of a machine is ten years and its depreciation rate is 10% per annum on the residual value of the asset. Explain how the disposal should be accounted for in the financial statements. A company purchased a building on 1 April 20X1 for $100,000 at which point it was considered to have a useful life of 40 years. At the year-end of 31 March 20X6, the company revalued the building to its fair value of $98,000. Depreciation does not cease when an asset is idle or retired from active use . However, depreciation may be zero under the “units of production method”.

cost of dismantling

However a revaluation increase must be recognized in profit and loss to the extent that it reverses a revaluation decrease of the asset that was previously recognized as an expense. If revaluation surplus is existing on that asset it should be debited to revaluation surplus, any excess than the revaluation surplus should be debited to statement of profit and loss. Entity A’s management can apply the revaluation model only to the office buildings. The office buildings can be clearly distinguished from the industrial buildings in terms of their function, their nature and their general location.

The depreciable amount of an property, plant, and equipment definition should be allocated on a systematic basis over its useful life. Any remaining carrying amount of the cost of the previous inspection is derecognized. Are expected to be used during more than a period of twelve months. 6 Transitional Provisions given in Paragraphs are relevant only for standards notified under Companies Rules, 2006, as amended from time to time.

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. Usage is assessed by reference to the expected capacity or physical output of the asset. Decrease in carrying amount that is accounted for in accordance with paragraphs 42 and 43. Purposes other than to produce inventories during that period. The carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of this Standard (see paragraphs 74-80).

When the asset is purchased, when it is sold, when it is taken on hire/lease or any other case, it is important to find the cost of the asset. According to IND AS-16, inspection costs must be capitalized and de-recognized later on. Whereas in AS-10, capitalization concept is not dealt with. Whereas in AS-10, Real estate related costs are excluded explicitly. The other name of Property, Plant and Equipment is “Fixed Asset”.

However, under usage methods of depreciation, the depreciation charge can be zero while there is no production. 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.

Accounting Standard 10 prescribes the accounting treatment for property, plant, and equipment to users of the financial statements this will help them to discern information about an investment that is made by the enterprise. The decision about its property, plant, and equipment and the changes in that investment. An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its cost.

Thus it is important in accounting to calculate the estimated business value and its taxability. Is the asset’s purchase price and should be the total price arrived at including non-refundable taxes, import duties, rebates, discounts, etc. It also includes the transportation costs to bring the asset to a specific location, the installation costs and the costs incurred to put the asset into production.

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. This Standard should be applied in accounting for property, plant and equipment except when another Accounting Standard requires or permits a different accounting treatment. Gains or Losses on disposal should be recognized in P&L as income/expense. An entity cannot classify gain as revenue on disposal of specific item of PP&E. When an asset is permanently withdrawn for use or sold/scrapped, and no future economic benefits are expected, then it should be withdrawn from PP&E.