Accounting Standard 10
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.
These issues in accounting for property, plant, and equipment which help in the recognition of the assets, the determination of their carrying amounts, and the depreciation charges and impairment losses are recognized in relation to them.
Scope
The Accounting Standard should be applied in the accounting for property, plant, and equipment while another Accounting Standard requires a different accounting treatment. This Accounting Standard does not apply to:
Biological assets that are related to agricultural activity else than the bearer plants.
Applies to wasting assets which includes mineral rights, expenditure on the exploration for and extraction of the minerals, oil, natural gas, and similar other non-regenerative resources.
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.
For example, AS 19, in Leases, requires an enterprise that evaluates recognition of an item of the leased property, plant, and equipment on the basis of the transfer of risks and rewards. However, in the rest of other cases different aspects of the accounting treatment for these assets which includes depreciation, are prescribed by this Standard. Also, investment property, which is defined in AS 13, accounting for Investments, should be accounted for in accordance with the cost model prescribed in this standard.
AS 10 Property Plant Equipment
Now we know that Accounting Standard 10 deals with Property, Plant, and Equipment (PPE). The basic purpose of this standard is to lay down or specify the accounting treatment for Property, Plant, and Equipment.
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.
The main challenges which account for property, plant, and equipment include:
Recognition of the assets.
Calculating the carrying amounts of the assets.
Determining the depreciation charges and the impairment losses in respect of the property, plant, and equipment.
Application of AS 10
AS 10 is to be applied when accounting for property, plant, and equipment. However, this may not be applied in cases where another accounting standard allows for different accounting treatment for the property, plant, and equipment.
In the following cases the AS 10 is not applied:
In biological assets like live animals or plants pertaining to the agricultural activity other than bearing plants.
AS 10 applies to the bearer plants but is not applicable to the produce on those bearer plants.
Recognition of Assets
The cost assigned to an asset that comes under the Property, Plant, and Equipment as per the AS 10 is identified as an asset only if:
The future economic benefits are predicted to arise from such an asset that would come to the business unit.
The cost of a particular asset is to be reliably measured.
Also, items like - spare parts, stand-by-equipment, and servicing equipment are considered as the Property, Plant, and Equipment if that item meets the criteria of PPE as according to AS 10. Other than this, if the item does not fulfil then such items are categorized under inventory.
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.
FAQs on Depreciation Accounting: AS 10 Overview
1. What is depreciation, and what is its main purpose according to AS 10?
Depreciation is the systematic allocation of the cost of a tangible asset over its useful life. Its main purpose, as guided by Accounting Standard 10 (AS 10), is to match the cost of the asset with the revenues it helps to generate over time, providing a true and fair view of a company's profitability and financial position.
2. What types of assets are considered Property, Plant, and Equipment (PPE) under AS 10?
Under AS 10, Property, Plant, and Equipment (PPE) are tangible items that meet two conditions:
- They are held for use in producing or supplying goods/services, for rental, or for administrative tasks.
- They are expected to be used for more than one accounting period.
3. What are the main methods of depreciation allowed by AS 10?
AS 10 permits several depreciation methods, but the two most common are:
- Straight-Line Method (SLM): A fixed amount of depreciation is charged every year.
- Written-Down Value (WDV) Method: Depreciation is charged at a fixed percentage on the asset's book value, which decreases each year.
4. How does a business decide whether to use the Straight-Line or Written-Down Value method?
The choice depends on the asset's pattern of benefits. The Straight-Line Method (SLM) is suitable for assets that provide benefits evenly over their life, like a building. The Written-Down Value (WDV) Method is better for assets that are more efficient in their early years and require more maintenance later, such as machinery or vehicles. The goal is to accurately match the expense to the benefit.
5. What happens if a company realises the useful life of an asset is different from its original estimate?
If the estimated useful life of an asset changes, it is considered a change in an accounting estimate, not an error. According to AS 10, this change is applied prospectively. This means the remaining undepreciated amount of the asset is spread over the *new* remaining useful life. Past years' depreciation is not recalculated.
6. Why is it important to disclose depreciation policies in a company's financial statements?
Disclosing depreciation policies is crucial for financial transparency. It helps investors and analysts understand how the company is valuing its assets and calculating its profit. This information is vital for comparing the company's performance against others in the same industry and for making informed economic decisions.
7. What are 'bearer plants' and how does AS 10 treat them?
A bearer plant is a living plant, such as a fruit tree or grape vine, that is used to produce agricultural products for more than 12 months. Under AS 10, bearer plants are accounted for in the same way as other self-constructed Property, Plant, and Equipment. However, the agricultural produce growing on these plants is treated separately.
