Changes in AS 10 and AS 6_ Accounting for fixed assets and AS 6 -Depreciation accounting

AS 10 – Accounting for fixed assets and AS 6 -Depreciation accounting

The notification has changed the name of AS 10 to “Property, Plant and Equipment” from “accounting for fixed assets”. AS 6 “depreciation accounting’ has been omitted and all the provision related to depreciation has been merged into AS 10 only. Now, AS 10 (Revised) will contain provisions relating to deprecation methods, Useful life etc… Some of the major changes are as follows:

Definition of fixed asset

As per existing definition, fixed asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. 

As per the revised definition, Property, plant and equipment are tangible items that (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than a period of twelve months

Now, if expected usage period of more than one year has been added in the definition.

Component Accounting

Existing accounting standard provides that component approach can be applied only when it’s practical to do so, which basically means that its applicability is not mandatory at all. The Companies Act 2013 also contains requirements for the componentisation. The requirement shall be voluntary in respect of F.Y. 2014-15 and mandatory from financial years commencing on or after the April 01, 2015. Now, the component accounting has also been introduced in the revised AS 10 in sync with the Ind AS 16 and Schedule II to Companies Act, 2013.

The underlying principle behind componentization is simple and logical – all components of a fixed asset that has been acquired will not have the same useful life and additionally, they may depreciate at different rates all through their life. Therefore, it is correct to depreciate each significant component separately over its useful life.

Revaluation of assets

Under the existing standard, an entity cannot adopt revaluation model as its accounting policy. The entity can select assets for revelation on a systematic basis and there was stipulated time frame within which the entity must revalue the assets.

As per the revised standard, an entity should choose either the cost model or the revaluation model as its accounting policy and should apply that policy to an entire class of property, plant and equipment. Further, revaluations should be made with sufficient regularity to ensure that the carrying amount does not differ materially fair value at the balance sheet date. If an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs should be revalued.

Deferred payments (beyond normal credit terms)

If payment of any item of PPE is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognised as interest expense over the period of credit and the asset is recorded at cash price equivalent.

For example: Entity A, purchased asset X for Rs 500,000. The normal credit period was one month. However, the supplier has agreed to settle the payment after 2 years. The entity need to record the asset at the cash price equivalent which is around Rs 400,000 and the amount of  Rs 100,000 will be recorded as interest cost over the credit period.

Review of Useful life, Residual Value and Depreciation Method

Under the existing standard, there was no timeframe within with an entity has to review the residual value, the useful life and depreciation method should be reviewed at least at each financial year-end and, if expectations differ from previous estimates, the change(s) should be accounted for as a change in an accounting estimate.

Change in Depreciation Method

Under the existing standard, when the method of depreciation is changed, new depreciation method is applied from the date of the asset coming into use (i.e. retrospectively). The deficiency or surplus arising from retrospective re-computation of depreciation as per the new method is adjusted in the year of change. Such a change is treated as a change in accounting policy and according disclosed in the financial statements.

Under the revised standard, Change of depreciation method will be treated as change in estimates and will be applied prospectively.