Question 2 OR (a)

The important points of AS 10

6 marks

Time to write
About 12 minutes
Topic
Depreciation, PPE and AS 10
Notes
Crux notes

Question

Question 2 OR (a) · 6 marks

Explain the important points of AS 10 in regard to Property, Plant and Equipment.

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

12 minfor 6 marks

Read from the question

  • ExplainEach point stated, then explained in a line or two.

Write it in this order

  1. Read; underline the asks; jot your points 1 min
  2. 1 Objective, scope and meaning of PPE points 1–2 1 mark 2 min
  3. 2 Recognition and measurement at cost points 3–4 2 marks 3 min
  4. 3 Cost model and revaluation model point 5 1 mark 2 min
  5. 4 Depreciation, review, derecognition and disclosure points 6–9 2 marks 3 min
  6. Check: every ask answered, key terms underlined 1 min

Short on time? Trim steps 2 and 4 evenly rather than skip one: each is capped at its own marks.

Try it first. About 12 minutes for 6 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

AS 10 (revised 2016), Property, Plant and Equipment, prescribes how property, plant and equipment (PPE) is accounted for, so that users can see the enterprise's investment in PPE and the changes in it. Its main issues are recognising the assets, finding their carrying amounts, and the depreciation and impairment losses to be recognised. Its important points are these.

Picture itThe important points of AS 10

1The press arrives: price paid, and the fitters' work counted into its cost.

Measurement at recognitionAn item is first measured at cost.

2First sheet out of the machine—from today, the calendar starts eating its value.

DepreciationDepreciation begins when the asset is available for use.

3Year-end: gauge in hand, they re-ask how long the press will serve and what it will fetch.

Review and changesResidual value and useful life are reviewed at least at each year-end.

4Years later it rolls onto the truck, sold—and leaves the books with a last handshake.

DerecognitionAn item is derecognised on disposal, or when no future benefits are expected from it.

  1. Scope. It applies to all PPE unless another standard requires a different treatment. It does not apply to biological assets other than bearer plants, or to wasting assets such as mineral rights and the costs of exploring for and extracting minerals, oil and gas.
  2. Meaning of PPE. Tangible items “held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and” (AS 10, para 6) expected to be used for more than twelve months.
  3. Recognition. The cost of an item is recognised as an asset only if it is probable that future economic benefits will flow to the enterprise and the cost can be measured reliably. Spare parts, stand-by and servicing equipment are PPE when they meet the definition; otherwise they are inventory.
  4. Measurement at recognition: cost. An item is first measured at cost: its purchase price, including import duties and non-refundable taxes, less trade discounts and rebates, plus costs directly attributable to bringing it to the location and condition needed for it to operate as management intends.
  5. Measurement after recognition: cost model or revaluation model, chosen as a policy and applied to a whole class of PPE. Under the cost model the item is carried at cost less accumulated depreciation and impairment losses. Under the revaluation model it is carried at a revalued amount; an increase is credited to revaluation surplus, except to the extent it reverses an earlier decrease charged to profit and loss.
  6. Depreciation. The depreciable amount (cost, or another amount substituted for cost, less residual value) is allocated systematically over the useful life. Each part whose cost is significant to the whole is depreciated separately. The method (straight-line, diminishing balance or units of production) must reflect the pattern in which the asset's benefits are consumed. Depreciation begins when the asset is available for use.
  7. Review and changes. Residual value and useful life are reviewed at least at each year-end, and the method is reviewed too. A change in any of them is a change in an accounting estimate under AS 5, applied from then on.
  8. Derecognition. An item is derecognised on disposal, or when no future benefits are expected from it. The gain or loss goes to the statement of profit and loss, and a gain is not classified as revenue.
  9. Disclosure. For each class of PPE: the measurement bases, the depreciation methods, and the useful lives or rates used.

Where the 6 marks sit

#ComponentMarks
1Objective, scope and meaning of PPE (points 1–2)1
2Recognition and measurement at cost (points 3–4)2
3Cost model and revaluation model (point 5)1
4Depreciation, review, derecognition and disclosure (points 6–9)2
Total6
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