Even though Indian Accounting Standards (Ind AS) implementation is in its track, Ministry of Corporate Affairs (MCA)has notified Companies (Accounting Standards) Amendment Rules, 2016 on March 30, 2016 and rules made applicable from the date of notification in the Official Gazette. The rule modifies 6 existing AS, omits AS6 ‘Depreciation Accounting’ and substituting AS10 with a new AS, viz., AS10 (Revised) ‘Property, plant and equipment’.
Why is the Amendment needed?
Currently India is having two sets of Accounting standards, viz.,
- Accounting Standards notified under Companies (Accounting Standards) Rules, 2006 and
- Indian Accounting Standards notified under Companies (Indian Accounting Standards) Rules, 2015.
The Ind AS is applicable for larger enterprises and the exiting AS still in force to Small and Medium Enterprises. MCA aims at modifying the existing AS in conformity with Ind AS/IFRS. This Amendment is the first steps towards the same. Even though the rule deals with eight Accounting Standards in force, major changes have been made to two Accounting Standards only, viz., AS6 ‘Depreciation Accounting’ and AS10 ‘Accounting for Fixed Assets’.
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.
- This Standard should be applied in accounting for property, plant and equipment except when another Accounting Standard requires or permits a different accounting treatment.
- This Standard does not apply to:
- biological assets related to agricultural activity other than bearer plants. This Standard applies to bearer plants; and
- wasting assets including mineral rights, expenditure on the exploration for and extraction of minerals, oil, natural gas and similar non-regenerative resources.
- Property, Plant and Equipment
Property, plant and equipment are tangible items that:
- are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
- are expected to be used during more than a period of twelve months.
- Bearer Plant
Bearer plant is a plant that
- is used in the production or supply of agricultural produce;
- is expected to bear produce for more than a period of twelve months; and
- has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.
- The cost of an item of property, plant and equipment should be recognised as an asset if, and only if:
- it is probable that future economic benefits associated with the item will flow to the enterprise; and
- the cost of the item can be measured reliably.
- 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:
- Initial Costs: are those costs initially to acquire or construct an item of property, plant and equipment; and
- Subsequent Costs: are those costs incurred subsequently to add to, replace part of, or service it.
Measurement at Recognition
An item of property, plant and equipment that qualifies for recognition as an asset should be measured at its cost.
Measurement after Recognition
An enterprise should choose either the cost model or the revaluation model in as its accounting policy and should apply that policy to an entire class of property, plant and equipment.
- Cost Model
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
- 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.
- If an Asset’s carrying amount is increased as a result of revaluation, the increase should be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase should be recognised in the profit and loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in the profit and loss account.
- If an Asset’s carrying amount is decreased as a result of revaluation, the decrease should be recognised in the profit and loss. However, the decreased should be recognised in the other comprehensive income to the extent of any credit balance existing in the revaluation surpus in respect of that asset. The decrease recognised in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus.
Self Constructed Asset
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.
- Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.
- 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. The depreciable amount of an asset should be allocated on a systematic basis over its useful life. The residual value and the useful life of an asset should be reviewed at least at each financial year-end.
- 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.
- 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. 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.
- A variety of depreciation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life. The methods given in AS 10 (R) are;
- Straight-line method
- The diminishing balance method
- The units of production method
An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. To determine whether an item of property, plant and equipment is impaired, an enterprise applies AS 28, Impairment of Assets. 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.
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.
- The carrying amount of an item of property, plant and equipment should be derecognised
- on disposal; or
- when no future economic benefits are expected from its use or disposal.
- 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. 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.
The disclosure requirement under this standard is much wider than the previous standard and the disclosure requirements as required under Companies Act, 2013. These disclosure requirements provide a greater level of understandability about the accounting treatment of the items of property, plant and equipment.