AS 10 Property, Plant and Equipment prescribe the accounting treatment for properties, P&E (Plant and Equipment) so that the users of financial statements could recognize and appreciate the information about the investment made by any enterprise in property, P&E and the also understand the changes made in such investments.
Applicability of AS 10 Property, Plant and Equipment
AS 10 is to be applied in accounting for property, P&E (Plant and Equipment) and this standard are not applicable to:
(a) Biological assets which are related to agricultural activities except for bearer plants. The Standard is applicable to bearer plants, however, it doesn’t apply to the produce on bearer plants; and
(b) Wasting assets which include mineral rights, expenses related to exploration for and extraction of oil, minerals, natural gas and other non-regenerative resources.
Recognition of Asset under AS 10 Property, Plant and Equipment
The cost of property and P&E should be recognized as an asset only if:
(i) It is apparent that the future economic benefits related to such asset would flow to the business.
(ii) The cost of such asset could be reliably measured.
Measurement of cost of the asset
An enterprise can select the revaluation model or the cost model as the accounting policy and employ the same to the entire class of its properties and P&E. According to the cost model, after recognizing the asset as an item of property or plant and equipment, it should be carried at the cost less the accumulated depreciation and the accumulated impairment losses (if any).
As per revaluation model, once the asset is recognized and its fair value could be measured reliably, then it must be carried at the revalued amount, which is the fair value of such asset at the date of the revaluation as reduced any following accumulated depreciation and accumulated impairment losses (if any). 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.
Depreciation under AS 10 Property, Plant and Equipment
As per the standard, depreciation charge for every period must be recognized in the P/L Statement unless it’s included in carrying the amount of any another asset. Depreciable amount of any asset should be allocated on a methodical basis over the useful life of the asset.
Every part of property or P&E (Plant and Equipment) whose cost is substantial with respect to the overall cost of the item must be depreciated separately.
The standard also prescribes, that the residual value and useful life of an asset must be reviewed at the end of each financial year and, in case the expectations vary from the previous estimates, changes must be accounted for as changes in accounting estimate as per Accounting Standard 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies.
The method of depreciation employed must reflect the pattern of future economic benefits of the asset consumed by an enterprise. Various depreciation methods could be used for allocating the depreciable amount of an asset on a methodical basis over the useful life of the asset. The methods include SLM (Straight-line Method), diminishing balance method or units of production method.