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IND AS – ROAD MAP

ABBREVIATION STANDS FOR NOS WHO ISSUED
IFRS International Financial Reporting 1-15 IASB
Standards
IAS International Accounting Standards 1-41 IASC
IND AS Indian Accounting Standards 1-41 ASB (Notified by CG)
101-115
CASR 2006 Companies Accounting Standard 1-29 ASB (Notified by CG)
Rules

In the presentation of the Union Budget 2014–15, the Honorable Minister for Finance, Corporate Affairs and
Information and Broadcasting proposed the adoption of Ind AS. The Minister clarified that the respective
regulators will separately notify the date of implementation for banks and insurance companies. Also, standards
for tax computation would be notified separately. In accordance with the Budget statement, the MCA has notified
Company (Indian Accounting Standard) Rules 2015 vide its G.S.R dated 16 February 2015. Accordingly, it has
notified 40 Ind AS and has laid down an Ind AS transition road map for companies. Even now banking
companies, insurance companies and non- banking finance companies are covered.

1) Ind AS: From years it was not well decided how much IFRS to be followed by Indian Companies. Need arises
to get our financial statements more modernize and standardized with the global scenario. A way out through it
was to adopt Ind AS. Adopting Ind AS is a convergence of IFRS. Ind AS is in substitution of IFRS to get Indian Co
listed abroad and demand cheaper capital from cash rich countries.

2) Carve in and Carve outs: As already discussed above that Ind AS is a modified IFRS or converged IFRS. The
difference between Ind AS and IFRS / IAS is known as Carve outs / Carve ins.

3) Road map of Indian companies to become IFRS compliant?

On 16 February 2015, the MCA notified the Companies Accounting Standards rules 2015 laying down the
roadmap for application of IFRS converged standards.

Comprehensive Table showing Ind AS applicability:

Companies classified for Ind AS Year of applicability
Unlisted as well as Listed companies 2015 – 2016
(all companies). Its Voluntary adoption.
Holding / Subsidiary / Associates of the above.
Companies (listed as well as unlisted) having a net worth of ≥ 500 2016 – 2017
crores.
Holding / Subsidiary / Associates of the above.
All listed companies have to follow mandatorily Ind AS in this year
Unlisted companies net worth ≥ 250 crores.
Holding / Subsidiary / Associates of the above.
2017-2018

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Ind AS for Banks / Insurance companies / NBFC’s

Companies classified for Ind AS Year of applicability
Scheduled commercial Banks (excluding RRBs) 2018 – 2019
India term lending refinancing institutions ex: NABARD, NHB etc
Insurers / Insurance Companies
Holding / Subsidiary / Associates of the above.
NBFCs: 2018 – 2019
Companies having a net worth of ≥ 500 crores.
Holding / Subsidiary / Associates of the above.
NBFCs:
All listed companies have to follow mandatorily Ind AS in this year
Unlisted companies net worth ≥ 250 crores.
Holding / Subsidiary / Associates of the above. 2019-2020

Ind AS roadmap
Other important points:
1. All the above compliances are from 1/4/2015. Early adoption permitted from 1 April 2015, with one year
comparatives.
2. Once adopted, cannot be revoked
3. Companies not covered by the roadmap to continue to apply existing standards
4. For Net Worth Rs 500 cr or 250 cr one has to see previous year for compliance in the next year. For ex:
Implementation of IND AS in 2015-2016 the Net worth should be seen for 01.04.2014.
4. Net worth for a company is to be calculated in accordance with its stand-alone financial
statements.
5. Overseas subsidiary, associate, joint venture and other similar entity (ies) of an Indian company may prepare
its stand-alone financial statements in accordance with the requirements of the specific jurisdiction. However,
for group reporting purpose (s), it will have to report to its Indian parent under Ind AS to enable its parent to
present CFS in accordance with Ind AS.
Subsidiary includes sub – subsidiary.
6. Once Ind AS is adopted reverting back is not allowed.

7. Net Worth?
Net Worth is defined as per section 2 (57) of the Companies Act 2013;
(i) Paid up Share Capital
(ii) Profit / Reserves arising out of the appropriations.
(iii)Securities Premium

Deduct from above: Accumulated losses, Miscellaneous exp., Deferred revenue expenditure.
Not to consider: Capital Reserves arising out of Amalgamation and revaluation reserves.

8. Ultimately Banks, NBFCs, Insurance Companies will be covered from 1/4/2018.

9. Following entities will not follow Ind AS:
SME listed with Stock Exchange, Unlisted Companies whose Net Worth is < Rs 250 crores, NBFCs whose Net
Worth is < Rs 250 crores, Non – Corporate Entities, Urban Co-op. Banks, Rural Regional Banks.+

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Problem :
Company A is a listed company and has three Subsidiaries Company X, Company Y and Company Z. As on 31st
March 2014, the net worth of Company A is ` 600 crore, net worth of Company X is ` 100 crore, Company Y is
` 400 crore and Company Z is ` 210 crore. All the three subsidiaries are non-listed public companies. Comment
in case of following three situation:

A. During the financial year 2014-15, Company A has sold off its entire investment in Company X on 31st
December 2014. Therefore, Company X is no longer a subsidiary of Company A for the purposes of preparation of
financial statements as on 31st March 2015. Should Company X prepare its financial statements as per the
Companies (Accounting Standards) Rules, 2006 or the Companies (Indian Accounting Standards) Rules, 2015?

B. During the financial year 2015-16, Company A has sold off its investment in Company Y on 31st December,
2015. Therefore, Company Y is no longer a subsidiary of Company A for the purposes of preparation of financial
statements as on 31 March
2016. Should Company Y prepare its financial statements as per the Companies (Accounting Standards) Rules,
2006 or the Companies (Indian Accounting Standards) Rules, 2015?
C. During the financial year 2016-17, Company A has sold off its investment in Company Z on 31st December
2016, therefore company Z is no longer a subsidiary of Company A for the purposes of preparation of financial
statements as on 31st March 2017. Should Company Z prepare its financial statements as per the Companies
(Accounting Standards) Rules, 2006 or the Companies (Indian Accounting Standards) Rules, 2015?

Ans. The Companies (Indian Accounting Standards) Rules, 2015, states that the following companies shall
comply with Ind AS for the accounting periods beginning on or after 1st April, 2016, with the comparatives for
the periods ending on 31st March, 2016, or thereafter, namely:-
(A) companies whose equity or debt securities are listed or are in the process of being listed on any stock
exchange in India or outside India and having net worth of rupees five hundred crore or more;
(B) companies other than those covered by point (a) above and having net worth of rupees five hundred crore or
more;
(C) holding, subsidiary, joint venture or associate companies of companies covered by
point (a) and (b) as the case may be; Further, the Companies (Indian Accounting Standards) Rules, 2015, states
that for the purposes of calculation of net worth of companies, the following principles shall apply, namely:-

(a) the net worth shall be calculated in accordance with the stand-alone financial statements of the company as
on 31st March, 2014 or the first audited financial statements for accounting period which ends after that date;
(b) for companies which are not in existence on 31st March, 2014 or an existing company falling under any of
thresholds specified for the first time after 31st March, 2014, the net worth shall be calculated on the basis of the
first audited financial statements ending after that date in respect of which it meets the thresholds specified.
The companies meeting the specified thresholds for the first time at the end of an accounting year shall apply Ind
AS from the immediate next accounting year in the manner specified above.

Once a company starts following Ind AS either voluntarily or mandatorily on the basis of criteria specified, it
shall be required to follow Ind AS for all the subsequent financial statements even if any of the criteria specified
in the rule does not subsequently apply to it. In view of the above requirements, Company A meets the criteria as
specified the Companies (Indian Accounting Standards) Rules, 2015, on 31st March, 2014.
Accordingly, the Companies (Indian Accounting Standards) Rules, 2015, will become applicable to the Company
on mandatory basis from accounting periods commencing 1st April, 2016.
A holding, subsidiary, joint venture or associate company of a Company to which the Companies (Indian
Accounting Standards) Rules, 2015 applies will be required to follow the Companies (Indian Accounting
Standards) Rules, 2015 for preparing and presenting its financial statements. In the abovementioned case,
Company A has net worth of more than ` 500 crore in the financial year ending 31st March 2014. Therefore,
ordinarily Company A along with its subsidiaries will have to apply Indian Accounting Standards (Ind ASs) for
preparing financial statements for the accounting periods commencing1st April, 2016, except in situations
covered by Case A and Case B as discussed below.

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A. Company A has sold off its entire investment in Company X on 31st December, 2014; Company X is no longer a
subsidiary of Company A as at the beginning of 1st April, 2016. Therefore, in this case, Company X would
continue to prepare financial statements for the accounting periods commencing 1 st April, 2016, as per the
Companies (Accounting Standards) Rules, 2006.

B Company A has sold its investment in subsidiary Company Y on 31st December, 2015, in consequence of which
Company Y is no longer subsidiary of Company A as at the beginning of 1 st April, 2016. Therefore, the Companies
(Indian Accounting Standards) Rules, 2015 will not be applicable to Company Y. Therefore, Company Y would
continue to prepare financial statements for accounting periods commencing April 1, 2016 under the Companies
(Accounting Standards) Rules, 2006.

C Company A has sold its investment in subsidiary Company Z on 31st December, 2016; therefore, Company Z
was a subsidiary of Company A as at the beginning of 1 st April, 2016. Company Z being subsidiary of Company A
as at the beginning of 1st April, 2016, would have to prepare financial statements for the accounting periods
commencing 1st April, 2016 as per the Companies (Indian Accounting Standards) Rules, 2015.

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IND AS NOT COVERED IN THE CLASSROOM

CONSOLIDATED FINANCIAL STATEMENTS

Ind AS – 27:

1 Makes the preparation of Consolidated Financial Statements mandatory for a parent.

2 Does not mandate preparation of separate financial statements.

3 Provides guidance for accounting for investments in subsidiaries, jointly controlled entities and associates in
preparing the separate financial statements.

4 Does not give any such exemption from consolidation except that if a subsidiary meets the criteria to be
classified as held for sale, in that case it shall be accounted for as per Ind AS 105, Noncurrent Assets held for Sale
and Discontinued Operations.

5 Does not explain the same.

6 Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its
activities.

7 Existence and effect of potential voting rights that are currently exercisable or convertible are considered
when assessing whether an entity has control over the subsidiary.

8 The length of difference in the reporting dates of the parent and the subsidiary should not be more than three
months.

9 Require the use of uniform accounting policies.

10 The issue related to Taxes of Holding and Subsidiary has not been dealt with in Ind AS 27, as the same is dealt
with in Ind AS 12 Income taxes already.

11 Existing AS 21 provides clarification regarding disclosure of parent’s share in post-acquisition reserves of a

subsidiary. The same has not been dealt with in Ind AS 27.

12 Appendix A of Ind AS 27 provides guidance on consolidation of Special Purpose Entities (SPEs).

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AS – 21:

1 Does not mandate the preparation of Consolidated Financial Statements by a parent.

2 Consolidated Financial Statements are prepared in addition to separate financial statements

3 Does not deal with the same.

4 Subsidiary is excluded from consolidation when control is intended to be temporary or when subsidiary
operates under severe long term restrictions.

5 Explains where an entity owns majority of voting power because of ownership and all the shares are held as
stock -in-trade, whether this amounts to temporary control. Also explains the term ‘near future’.
6 The definition of control given in the existing AS 21 is rule-based, which requires the ownership, directly or
indirectly through subsidiary(ies), of more than half of the voting power of an enterprise; or control of the
composition of the board of directors in the case of a company or of the composition of the corresponding
governing body in case of any other enterprise so as to obtain economic benefits from its activities.

7 For considering share ownership, potential equity shares of the investee held by investor are not taken into
account.

8 Permits the use of financial statements of the subsidiaries drawn upto a date different from the date of
financial statements of the parent after making adjustments regarding effects of significant transactions. The
difference between the reporting dates should not be more than six months.

9 Require the use of uniform accounting policies. However, existing AS 21 specifically states that if it is not
practicable to use uniform accounting policies in preparing the consolidated financial statements, that fact
should be disclosed together with the proportions of the items in the consolidated financial statements to which
the different accounting policies have been applied.

10 Existing AS 21 provides clarification regarding accounting for taxes on income in the consolidated financial
statements i.e. Taxes as per Holding and Subsidiary should be just merged arithmetically.

11 Existing AS 21 provides clarification regarding disclosure of parent’s share in post-acquisition reserves of a

subsidiary.

12 Existing AS 21 does not provide guidance on consolidation of Special Purpose Entities (SPEs).

AMALGAMATION AND ABSORPTION OF COMPANIES:

Ind AS – 103:

1 As per Ind AS 103 only Purchase method of Amalgamation is allowed. Merger method id abandoned.

2. Under Ind AS 103, the goodwill is not amortised but tested for impairment on annual basis in accordance with
Ind AS 36.

3 IFRS deals with reverse acquisitions whereas the existing AS 14 does not deal with the same.

4 As per IFRS, the consideration includes any asset or liability resulting from a contingent consideration
arrangement.
5 IFRS gives guidance on Preexisting relationships on which AS-14 is silent.

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6. Ind AS 103 requires that for each business combination, the acquirer shall measure any non-controlling
interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the
acquiree’s identifiable net assets.

AS – 14:

1 As per AS – 14 both Merger and Purchase method of Amalgamation is allowed.

2 The existing AS 14 requires that the goodwill arising on amalgamation in the nature of purchase is amortised
over a period not exceeding five years.
3 No concept of Reverse acquisition.

4 No concept of contingent consideration.

5 AS-14 is silent on pre – existing relationship.
6. On other hand, the existing AS 14 states that the minority interest is the amount of equity attributable to
minorities at the date on which investment in a subsidiary is made and it is shown outside shareholders’ equity.

INVESTMENTS IN ASSOCIATES

Ind AS – 28

1 Excludes from its scope, investments in associates held by venture capital organisations, mutual funds, unit
trusts and similar entities including investment-linked insurance funds.

2 Existence and effect of potential voting rights that are currently exercisable or convertible are considered
when assessing whether an entity has significant influence or not.

3 Requires application of equity method in financial statements even if the investor does not have any
subsidiary.

4 No such exemption is provided by Ind AS – 28.

5 In case of Separate Financial Statements investments in associates is to be accounted for at cost or in

accordance with Ind AS 109 Financial Instruments: Recognition and Measurement.

6 Length of difference in the reporting dates of the investor and the associate should not be more than three
months unless it is impracticable.

7 Require that similar accounting policies should be used. in case an associate uses different accounting policies
for like transactions, appropriate adjustments shall be made to the accounting policies of the associate.

8 Carrying amount of investment in the associate as well as its other long term interests in the associate that, in
substance form part of the investor’s net investment in the associate shall be considered for recognising
investor’s share of losses in the associate

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AS - 23

1 Does not make such exclusion.

2 For considering share ownership for the purpose of significant influence, potential equity shares of the
investee held by investor are not taken into account.

3 Equity method in financial statements is applicable only when the entity has one or more subsidiary and even
prepares Consolidation of Financial Statements.

4 One of the exemptions from applying equity method in the existing AS 23 is where the associate operates
under severe long-term restrictions that significantly impair its ability to transfer funds to the investee.

5 In separate financial statements, investment in an associate is not accounted for as per the equity method, the
same is accounted for in accordance with existing AS 13. The classification of the investments is Long Term
Investments for Trade purpose.s

6 Permits the use of financial statements of the associate drawn upto a date different from the date of financial
statements of the investor when it is impracticable to draw the financial statements of the associate upto the
date of the financial statements of the investor. There is no limit on the length of difference in the reporting dates
of the investor and the associate.

7 Require that similar accounting policies should be used. in case an associate uses different accounting policies
for like transactions, appropriate adjustments shall be made to the accounting policies of the associate.

8 Investor’s share of losses in the associate is recognised to the extent of carrying amount of investment in the
associate.

INVESTMENTS IN JOINT VENTURES

Ind AS – 31

1 Excludes from its scope, investments in joint vnetures held by venture capital organisations, mutual funds, unit
trusts and similar entities including investment-linked insurance funds.

2 No such exemption prevails.

3 Prescribes the use of proportionate consolidation method only.

4 Requires application of proportionate consolidation method in financial statements even if the venture does
not have any subsidiary.

5 In case of Separate Financial Statements investments in joint ventures is to be accounted for at cost or in
accordance with Ind AS 109 Financial Instruments: Recognition and Measurement.

6 This explanation has not been given in Ind AS 31 , regarding exemption as such situations are now covered by
Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations.

7 No provision regarding disclosure of venturer’s share in post-acquisition reserves of a jointly controlled entity.

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AS – 27

1 Does not make such exclusion.

2 Provides that in some exceptional cases, an enterprise by a contractual arrangement establishes joint control
over an entity which is a subsidiary of that enterprise within the meaning of AS 21. In those cases, the entity is
consolidated under AS 21 by the said enterprise, and is not treated as a joint venture.

3 Provides that a venturer can recognise its interest in jointly controlled entity using either proportionate
consolidation method or equity method.

4 Proportionate Consolidation Method in financial statements is applicable only when the entity has one or more
subsidiary and even prepares Consolidation of Financial Statements.

5 In separate financial statements, investment in a joint venture is accounted for in accordance with existing AS
13. The classification of the investments is Long Term Investments for Trade purpose.

6 Regarding the term ‘near future’ used in an exemption given from applying proportionate consolidation
method, i.e, where the investment is acquired and held exclusively with a view to its subsequent disposal in the
near future.

7 Provides clarification regarding disclosure of venturer’s share in post-acquisition reserves of a jointly

controlled entity.

CONSTRUCTION CONTRACTS

Ind AS - 11
1) No such specific reference to Borrowing Cost.

2) Requires that contract revenue shall be measured at fair value of consideration received/receivable.

3) Appendix A of Ind AS 11 deals with accounting aspects involved in Service Concession Arrangements and
Appendix B of Ind AS 11 deals with disclosures of such arrangements.

AS-7
1) Includes borrowing costs as per AS 16, Borrowing Costs, in the costs that may be attributable to contract
activity in general and can be allocated to specific contracts

2) Does not recognise fair value concept as contract revenue is measured at consideration received/receivable

3) Does not deal with accounting for Service Concession Arrangements. It is covered by Schedule II.

REVENUE RECOGNITION

Ind AS - 18
1) Definition of ‘revenue’ is broad compared to the definition of ‘revenue’ given in existing AS 9 because it covers
all economic benefits that arise in the ordinary course of activities of an entity which result in increases in equity,
other than increases relating to contributions from equity participants.

2) Revenue arising from agreements of real estate development are specifically scoped out

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3) Requires the revenue to be measured at fair value of the consideration received or receivable

4) Specifically deals with the exchange of goods and services with goods and services of similar and dissimilar
nature. Such transactions are known as “Revenue Swaps”

5) Requires recognition of revenue using percentage of completion method only

6) Requires interest to be recognised using effective interest rate method similar to Ind AS – 109.

7) No disclosure about excise duty as a deduction from revenue from sales transactions is mentioned.

AS-9

1) Revenue is gross inflow of cash, receivables or other consideration arising in the course of the ordinary
activities of an enterprise from the sale of goods, from the rendering of services, and from the use by othersof
enterprise resources yielding interest, royalties and dividends.

2) Existing AS 9 does not exclude the same

3) Revenue is recognised at the nominal amount of consideration receivable

4) This aspect is not dealt with in the existing AS 9.

5) Completed contract mehod is permitted.

6) Interest will be calculated as per nominal method.

7) Specifically deals with disclosure of excise duty as a deduction from revenue from sales transactions.

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Revised Accounting Standards

“Accounting Standard (AS) 2 : Valuation of Inventories

The entire AS remains same. Only a disclosure is required given below:

Disclosure
The financial statements should disclose:
(a) the accounting policies adopted in measuring inventories, including the cost formula used; and
(b) the total carrying amount of inventories and its classification appropriate to the enterprise.
27. Information about the carrying amounts held in different classifications of inventories and the extent of the
changes in these assets is useful to financial statement users. Common classifications of inventories are:
(a) Raw materials and components
(b) Work-in-progress
(c) Finished goods
(d) Stock-in-trade (in respect of goods acquired for trading)
(e) Stores and spares
(f) Loose tools
(g) Others (specify nature),”.

“Accounting Standard (AS) 4 : Events occurring………

The entire AS remains same. Only revision took place.

Contingency is introduced: For Contingency refer just AS-29 viz: Contingent Assets and Contingent liabilities.

Proposed Dividend:
Pre revised AS -4: Proposed dividend is an adjusting event as an exception.
As per Revised AS – 4 now Proposed dividend is not an adjusting event if declared after the balance sheet date.
Schedule III: Proposed dividend is to be disclosed separately.

Conclusion: Proposed dividend is to be disclosed separately. Proposed dividend declared after balance sheet is to
be recorded in the year of declaration.

“Accounting Standard (AS) 29 : Provsions………

The entire AS remains same. Only Onerous Contract is included within AS – 29 previously it was an
Accounting Standard Interpretation.

Onerous Contract
An onerous contract is a contract where the unavoidable costs of meeting the obligations > expected benefits. As
per Ind AS -37 losses arising out of owner contracts should be provided for Example In case of AS-7 if the total
Costs of construction > total revenue then provision is created for the expected loss and such contract is known
as onerous contract.
Example: An entity is bound under the terms of a franchise agreement for a local brand that it has marketed for
years. Based on market survey and a cost-benefit study, the entity decided to stop marketing the local brand and
entered into a new agreement to market an international brand. Although the entity does not derive any
economic benefit from the franchise agreement for the local brand, there is an obligation to pay a lump-sum
amount to the franchiser under the non cancellable franchise agreement for a period of two more years. Thus the
entity would need to make a provision for the commitment under the franchise agreement (since it is an onerous
contract).

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sProblem: Mini Ltd. took a factory premises on lease on 01.04.07 for ` 2,00,000 per month. The lease is
operating lease. During March 2008, Mini Ltd. relocates its operation to a new factory building. The lease on the
old factory premises continues to be live upto 31.12.2010. The Lease cannot be cancelled and cannot be sub-let
to another user. The auditor insists that lease rent of balance 33 months upto 31.12.2010 should be provided in
the accounts for the year ending 31.3.2008. Mini Ltd seeks your advice. (CA Final May 2008)

Solution:
1. “Onerous Contract” is a contract in which the unavoidable cost of meeting the obligation under the contract
exceeds the economic benefit expected under it.
2. In the given case , the operating lease contract has become onerous, as the economic benefit of lease contract
for next 33 months upto 31.12.2010 will be nil
3. Lessee, Mini Ltd has to pay lease rent of `66,00,000 (2,00,000 p.m for next 33 months). Therefore, provision
on account of `66,00,000 is to be made in the account for the year ending 31.03.08,in accordance with
AS-29 requirements.
Total period = 45 months → 12 months current yr and 33 months future period. Do you know 12 months period
rent is expenditure but 33 months future rent is a provision (loss).

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“Accounting Standard (AS) 10

Property, Plant and Equipment

AS – 6 has been withdrawn. AS – 10 has been revised. Following is the detailed provisions regarding AS -
10 and Depreciation.

1) Objective:
The objective of this Standard is to prescribe the accounting treatment for:
The accounting for property, plant and equipment
The recognition of the assets
The determination of their carrying amounts
The depreciation charges
The impairment losses to be recognised in relation to them.

2) Scope:
This Standard does not apply to:
(a) biological assets related to agricultural activity other than bearer plants. This Standard applies to bearer
plants but it does not apply to the produce on bearer plants; and
(b) wasting assets including mineral rights, expenditure on the exploration for and extraction of minerals, oil,
natural gas and similar non-regenerative resources.

However, this Standard applies to property, plant and equipment used to develop or maintain the assets
described in (a) and (b) above. For ex: An entity is engaged in growing mangoes (biological assets) and for the
same purchase they require tractors, machines, pumping stations etc. These fixed assets are covered by AS-10
PPE.
Other Accounting Standards may require recognition of an item of property, plant and equipment based on an
approach different from that in this Standard. For example, AS 19, Leases, requires an enterprise to evaluate its
recognition of an item of leased property, plant and equipment on the basis of the transfer of risks and rewards.
However, in such cases other aspects of the accounting treatment for these assets, including depreciation, are
prescribed by this Standard.
Investment property, as defined in AS 13, Accounting for Investments, should be accounted for only in
accordance with the cost model prescribed in this standard.

3) Definitions:
The following terms are used in this Standard with the meanings specified:
i) Agricultural Activity: Please refer IND AS -41 for detail explanation.

ii) Biological Asset: Please refer IND AS -41 for detail explanation.

iii) Bearer Plant: Please refer IND AS -41 for detail explanation.

iv) Carrying amount: It is the amount at which an asset is recognised after deducting any accumulated
depreciation and accumulated impairment losses. For ex: An asset is purchased initially at Rs 40,000.
Accumulated depreciation = Rs 12,000. Impairment = Rs 8,000. The Carrying Amount = Rs 20,000.

v) Enterprise -specific value is the present value of the cash flows an enterprise expects to arise from the
continuing use of an asset and from its disposal at the end of its useful life or expects to incur when settling a
liability.(This definition is similar to value in use as per AS-28).

vi) Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an
arm’s length transaction.
vii) Gross carrying amount of an asset is its cost or other amount substituted for the cost in the books of
account, without making any deduction for accumulated depreciation and accumulated impairment losses.

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viii) An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable
amount.

ix) Residual value of an asset is the estimated amount that an enterprise would currently obtain from
disposal of the asset, after deducting the estimated costs of disposal.

Residual value and Net Selling Price are two different terms. In case of net selling price it is current price after
deducting expenses. Residual value is net price after deducting expenses at the end of the useful life.

x) Recoverable amount is the higher of an asset’s net selling price and its value in use.

xi) Plant Property Eqipment: - Conditions :

(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.

4) Recognition principle of PPE:

The cost of an item of property, plant and equipment should be recognised as an asset if, and only if:
(a) it is probable that future economic benefits associated with the item will flow to the enterprise; and
(b) the cost of the item can be measured reliably.

5) Spare parts, spare parts and servicing equipment:

Items such as spare parts, stand-by equipment and servicing equipment are recognised in accordance with this
Standard when they meet the definition of property, plant and equipment (see conditions above). Otherwise, such
items are classified as inventory.

6) Moulds, tools and dies: It it may be appropriate to aggregate individually insignificant items, such as moulds,
tools and dies and to apply the criteria to the aggregate value. An enterprise may decide to expense an item
which could otherwise have been included as property, plant and equipment, because the amount of the
expenditure is not material.

An Accounting Standard on Agriculture is under formulation, which will, inter alia, cover accounting for livestock.
Till the time, the Accounting Standard on Agriculture is issued, accounting for livestock meeting the definition of
Property, Plant and Equipment, will be covered as per AS 10.

7) Point of Cost recognition:

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:
(a) initially to acquire or construct an item of property, plant and equipment; and
(b) subsequently to add to, replace part of, or service it.

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8) Initial Costs:
a) Purchased in cash:
An item of property, plant, and equipment that satisfies the recognition criteria should be
recognized initially at its cost. The Standard specifies that cost comprises:
• Purchase price, including import duties, nonrefundable purchase taxes, less trade discounts and rebates.
• Costs directly attributable to bringing the asset to the location and condition necessary for it to be used in a
manner intended by the entity
• Initial estimates of dismantling, removing, and site restoration costs.
Examples of directly attributable costs include
• Employee benefits of those involved in the construction or acquisition of an asset
• Cost of site preparation
• Initial delivery and handling costs
• Installation and assembly costs
• Costs of testing, less the net proceeds from the sale of any product arising from test production (Trial run).
• Borrowing costs to the extent permitted by AS-16, Borrowing Costs
• Professional fees

Examples of costs that are not directly attributable costs and therefore must be expensed in the income
statement include
• Costs of opening a new facility (inaugural expenses)
• Costs of introducing a new product or service e.g.: advertisement
• Office and administration expenses e.g.: office rent
• Advertising and promotional costs
• Costs of conducting business in a new location or with a new class of customer
• Training costs
• Administration and other general overheads
• Costs of incidental operations e.g.: cost of material for sample testing (not intended to be for commercial
reason)
• Initial operating losses e.g.: loss of gross profit due to low capacity.
• Costs of relocating or reorganizing part or all of an entity’s operations e.g.: costs of shifting business.

Problem 1)
Pollisure Limited is installing a new plant at its production facility. It has incurred these costs: 1) Cost of the
plant (cost as per supplier’s invoice plus taxes) ₹ 75,00,000, includes refundable taxes ₹ 1,70,000 and non –
refundable taxes ₹ 6,45,000, 2) Initial delivery and handling costs ₹ 200,000, 3) Cost of site preparation 5,00,000,
4) Consultants used for advice on the acquisition of the plant ₹700,000, 5) Estimated dismantling costs to be
incurred after 5 years ₹ 5,20,000, 6) Trial run costs : Materials ₹ 2,20,000, Labour ₹ 1,87,000, Overheads ₹
1,70,000. The entire product was sold at 75% of cost. 7) Inauguration expenses ₹25,000, 8) Operating losses
before commercial production 1,10,000. Discounting rate: 10%.
Required: Please advise Pollisure Limited on the costs that can be capitalized in accordance with Ind AS - 16.

Solution:
According to Ind AS - 16, these costs can be capitalized:
Cost of the plant:
Purchase price ₹ 75,00,000 - refundable taxes ₹ 1,70,000 + Initial delivery and handling costs ₹ 200,000 + Cost of
site preparation 5,00,000 + Consultants used for advice on the acquisition of the plant ₹ 700,000 + PV of
Estimated dismantling costs to be incurred after 5 years ₹ 3,22,879* + Trial run costs : Materials
₹ 2,20,000 + Labour ₹ 1,87,000 + Overheads ₹ 1,70,000 – Sale proceeds of trail run production (187000 +
170000 + 220000) x 0.75 = ₹ 95,37,129.
Inauguration expenses ₹25,000, Operating losses before commercial production 1,10,000 cannot be capitalized.
They should be written off to the income statement in the period they are incurred.
* PV of 520000 = 520000 / (1+0.10) 5 = ₹ 3,22,879

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b) Self Constructed Assets:

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.

c) Cost in case of exchange of assets:

If an asset is acquired in exchange for another asset, then the acquired asset is measured at its fair value. In the
following cases the deemed cost will not be the Fair Value:
(i) if the exchange lacks commercial substance;
(ii) or the fair value cannot be reliably measured,
in which case the acquired asset should be measured at the carrying amount of the asset given up.

d) Cost in case of Deferred Credit Basis: The cost of an asset is measured at the cash price equivalent at the date
of acquisition. If payment is “deferred” beyond normal credit terms, then the difference between the cash price
and the total price is recognized as a finance cost and treated accordingly. The general practice is not to discount
the future cash flows.

e) Dismantle and Restoration cost: Dismantle and site restoration cost is to be capitalized to the cost of an
asset. It is incurred while the asset is installed. A provision at present value is required for the site restoration
cost on the other hand. In case of a Mine site restoration costs is to be added to the mine. But the further digging
and extracting of ore is to be added to the inventory production while the inventory is extracted.
Problem: Suppose Gravity Limited purchased an equipment for Rs 45,00,000 including taxes as on today. The
plant will be removed / sold after the expiry of its useful life of 5 years. The initial estimates of the dismantle
costs worked out to Rs 3,00,000. Pass Journals for various years assuming the risk free rate for a 5 year t-bill is
7% and depreciation method SLM with no salvage..
Solution:
Year Carrying amt Depreciation Unwinding of PV of Liability
Discount
0 47,13,896 - - 2,13,896
1 37,71,117 9,42,779 14,973 2,28,869
2 28,28,338 9,42,779 16,021 2,44,890
3 18,85,559 9,42,779 17,143 2,62,032
4 9,42,779 9,42,779 18,342 2,80,374
5 0 9,42,779 19,626 3,00,000
Year1:
Plant a/c Dr 47,13,896 (45,00,000 + 2,13,896)
To Supplier / Cash a/c 45,00,000
To Provision for Dismantle costs 2,13,896 provision as per AS-29
(Being plant purchased / installed and dismantle costs provided for)
Year end:
Finance costs a/c Dr 14,973 trf to P/L
To Provision for Dismantle costs a/c 14973
(Unwinding of discount cost)

Depreciation a/c Dr 9,42,779  trf to P/L

To Plant a/c 9,42,779
(Being depreciation charged)

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Similar entries for all other years:

Year end 5:
Finance costs a/c Dr 19,626
To Provision for Dismantle costs a/c 19,626
(Unwinding of discount cost)

Depreciation a/c Dr 9,42,779  trf to P/L

To Plant a/c 9,42,779
(Being depreciation charged)

Provision for Dismantle costs a/c Dr 3,00,000

To Cash 3,00,000
(Dismantle costs incurred / paid)
Remember Decommissioning / Dismantle / Site Restoration costs due suffer changes or even P. V. Factor
changes and such changes should accounted as per para 67-68 of AS-10 (Rev).
f) Bearer Plants: (For recognition and valuation please refer Ind AS – 41 Agriculture)
g) Assets acquired at a consolidated price:
Where several items of property, plant and equipment are purchased for a consolidated price, the consideration
is apportioned to the various items on the basis of their respective fair values at the date of acquisition. In case
the fair values of the items acquired cannot be measured reliably, these values are estimated on a fair basis as
determined by competent valuers.
Illustration: Beetel Ltd purchased Building, Plant and Computer Set for a combo price of Rs 200 lakhs. The fair
market value of each asset is estimated to be Rs 150, Rs 90 and Rs 10 lakhs respectively. The cost for each asset
will be apportioned in the ratio of 15:9:1. Cost of each asset will be Rs 120, Rs 72 and Rs 8 respectively.
h) Assets as per AS-19: The cost of an item of property, plant and equipment held by a lessee under a finance
lease is determined in accordance with AS 19, Leases. As per AS-19 Lessee’s record the asset at the lower of PV of
Minimum Lease Payments or FMV.
i) Assets acquired through Government Grants:
The carrying amount of an item of property, plant and equipment may be reduced by government grants in
accordance with AS 12, Accounting for Government Grants. Assuming the entity has followed capital approach
and not income approach for recognizing the grants.

9) Subsequent Costs: Whether Revenue in nature or Capital:

i) Repairs and maintenance:
Under the recognition principle, an enterprise does not recognise in the carrying amount of an item of property,
plant and equipment the costs of the day-to-day servicing of the item. Rather, these costs are recognised in the
statement of profit and loss as incurred. Costs of day-to-day servicing are primarily the costs of labour and
consumables, and may include the cost of small parts. The purpose of such expenditures is often described as for
the ‘repairs and maintenance’ of the item of property, plant and equipment.
ii) Replacement:
Parts of some items of property, plant and equipment may require replacement at regular intervals. For example,
a furnace may require relining after a specified number of hours of use, or aircraft interiors such as seats and
galleys may require replacement several times during the life of the airframe. Similarly, major parts of conveyor
system, such as, conveyor belts, wire ropes, etc., may require replacement several times during the life of the
conveyor system. Items of property, plant and equipment may also be acquired to make a less frequently
recurring replacement, such as replacing the interior walls of a building, or to make a non-recurring
replacement. Under the recognition principle an enterprise recognises in the carrying amount of an item of
property, plant and equipment the cost of replacing part of such an item when that cost is incurred if the
recognition criteria are met (for recognition principle above). The carrying amount of those parts that are
replaced is derecognised in accordance with the derecognition provisions of this Standard (see further
paragraphs for dercognition).

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iii) Major Inspections :

A condition of continuing to operate an item of property, plant and equipment (for example, an aircraft) may be
performing regular major inspections for faults regardless of whether parts of the item are replaced. When each
major inspection is performed, its cost is recognised in the carrying amount of the item of property, plant and
equipment as a replacement if the recognition criteria are satisfied. Any remaining carrying amount of the cost of
the previous inspection (as distinct from physical parts) is derecognised.

iv) Operations not relevant for construction / development:

Some operations occur in connection with the construction or development of an item of property, plant and
equipment, but are not necessary to bring the item to the location and condition necessary for it to be capable of
operating in the manner intended by management. These incidental operations may occur before or during the
construction or development activities. For example, income may be earned through using a building site as a car
park until construction starts. Because incidental operations are not necessary to bring an item to the location
and condition necessary for it to be capable of operating in the manner intended by management, the income and
related expenses of incidental operations are recognised in the statement of profit and loss and included in their
respective classifications of income and expense.

10) Measurement after Recognition / Valuation of PPE:

An enterprise 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.
This principle is similar to Ind AS – 16.

i) 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.

ii) 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.
The fair value of items of property, plant and equipment is usually determined from market-based evidence by
appraisal that is normally undertaken by professionally qualified valuers.

If there is no market-based evidence of fair value because of the specialised nature of the item of property, plant
and equipment and the item is rarely sold, except as part of a continuing business, an enterprise may need to
estimate fair value using an income approach (for example, based on discounted cash flow projections) or a
depreciated replacement cost approach which aims at making a realistic estimate of the current cost of acquiring
or constructing an item that has the same service potential as the existing item.

Frequency of Revaluations:
The frequency of revaluations depends upon the changes in fair values of the items of property, plant and
equipment being revalued. When the fair value of a revalued asset differs materially from its carrying amount, a
further revaluation is required. Some items of property, plant and equipment experience significant and volatile
changes in fair value, thus necessitating annual revaluation. Such frequent revaluations are unnecessary for
items of property, plant and equipment with only insignificant changes in fair value. Instead, it may be necessary
to revalue the item only every three or five years.
When an item of property, plant and equipment is revalued, the carrying amount of that asset is adjusted to the
revalued amount.

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At the date of the revaluation, the asset is treated in one of the following ways:
(a) the gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying
amount of the asset. For example, the gross carrying amount may be restated by reference to observable market
data or it may be restated proportionately to the change in the carrying amount. The accumulated depreciation
at the date of the revaluation is adjusted to equal the difference between the gross carrying amount and the
carrying amount of the asset after taking into account accumulated impairment losses; or
(b) the accumulated depreciation is eliminated and revaluation should be adjusted on the net carrying amount.

Illustration:
Suppose Bhangubi Ltd has a Plant whose cost is 100 and accumulated depreciation 20. Suppose the net book
value get revalued upwards by 20%. Revaluation can be doen in the following two ways:
1) Gross method: Cost 120, PFFD 24 and Net Block 96.
2) Net method: Ignoring the cost we will consider the net block to be 96 (80+20% of 80).
Remember in both the case the revaluation reserve is 16.

Class of Assets for revaluation:

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.
A class of property, plant and equipment is a grouping of assets of a similar nature and use in operations of an
enterprise. The following are examples of separate classes:
(a) land;
(b) land and buildings;
(c) machinery;
(d) ships;
(e) aircraft;
(f) motor vehicles;
(g) furniture and fixtures;
(h) office equipment ; and
(i) bearer plants.
Accounting for Revaluation:

Upward revaluation: An increase in the carrying amount of an asset arising on revaluation should be credited
directly to owners’ interests under the heading of Revaluation Reserves. However, the increase should be
recognised in the statement of profit and loss to the extent that it reverses a revaluation decrease of the same
asset previously recognised in the statement of profit and loss.

Downward revaluation: A decrease in the carrying amount of an asset arising on revaluation should be charged to
the statement of profit and loss. However, the decrease should be debited directly to owners’ interests under the
heading of revaluation surplus to the extent of any credit balance existing in the revaluation surplus in respect of
that asset.

The revaluation surplus included in owners’ interests in respect of an item of property, plant and equipment may
be transferred to the revenue reserves (general reserves or similar other reserves) when the asset is
derecognised. Transfers from revaluation surplus to the revenue reserves are not made through the statement of
profit and loss.

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Depreciation
AS-6 is scrapped by MCA under the Companies Accounting Standards Rules 2016. Now Depreciation is
being merged with AS-10 (Rev). Also Depreciation includes the discussion on Schedule II also.

1) Highlights of Schedule II
Key highlights:
 Instead of % of depreciation now it is useful life of the asset. Remembering rate is
difficult but life is easy ex: 9 years is easy to recall but 11.11% is tough!
 Maximum cap on salvage value.
 Other than SLM, WDV even units of production can be applied.
 Component accounting is now mandatory.
 Schedule II is almost adhering to the principles of IFRS – IAS : 16 (Thanks Central
Government to keep policies akin to global guidelines)

PART A : Deals with main provisions relating to depreciation of tangible and intangible assets.
PART B : Deals with provisions relating to depreciation of assets covered by the act of the parliament.
PART C : Its provides the list of the useful life of an asset. It also provides some relevant notes related to the
calculation of depreciation.

Do you know: AS-6 states that depreciated should be calculated as per the rates given under special act / statute?
Ex: Electricity Act, Companies Act 1956. But now Schedule II overrides all the acts / statutes.

Do you know: Useful life is inversely proportion to Rate of depreciation. Higher the rate lower the useful life.

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PART A of Schedule II

TANGIBLE FIXED ASSETS:

Depreciation as per Schedule II is the systematic allocation of depreciation over the useful life. It means
depreciation is to be allocated as per the method chosen and up to its useful life.
Method permitted can be SLM, WDV or even production / unit method.
Depreciation amount will be (Cost – residual value). Can we say that Depreciation as per Schedule II is the
systematic allocation of depreciation amount over the useful life.
Useful life: Schedule II does not provides rates but has provided the maximum useful life. The useful life given in
PART ‘C’ is the maximum life (minimum rates of depreciation) .
Residual Value: The New Schedule related to depreciation casts a cap on the RV to be 5% on original cost.
Different Useful life and Residual Value: The useful life of an asset shall not be longer than the
useful life specified in Part ‘C’ and the residual value of an asset shall not be more than 5% of
the original cost of the asset:
Provided that where a company uses a useful life or residual value of the asset which is different from the above
limits, justification for the difference shall be disclosed in its financial statement.;

INTANGIBLE FIXED ASSETS:

Schedule II covers only one type of intangible asset for amortisation i.e. Toll rights. All other intangible assets are
to be covered by AS-26. Can we conclude that amortization of Patents, Copy - writes, Licenses; Brand etc are still
all covered by AS-26 except “Service Concessions arrangements”.

PART ‘B’:
The useful life or residual value of any specific asset, as notified for accounting purposes by a Regulatory
Authority constituted under an Act of Parliament or by the Central Government shall be applied in calculating the
depreciation to be provided for such asset irrespective of the requirements of this Schedule II. Example
Depreciation rates for Electricity Supply Company has to follow the old Schedule |

PART ‘C’:
Other important notes:
1) Asset costing ` 5000 or less:
There is no specific requirement to charge 100% depreciation on assets whose actual cost
does not exceed ` 5,000, so any assets irrespective of value should be categorized based on
Schedule II and depreciated based on Useful life of assets.

2) Additions and Dispositions:

Where during any financial year, any addition has been made or sold, discarded, demolished
or destroyed, the depreciation on such assets shall be calculated on pro rata basis.

3) Only one Intangible assets covered:

All Intangible Assets are covered by AS-26 except Toll road under BOT system. Amortization
in such case is based on Revenue basis.

4) Depreciation for double, triple shift assets:

In Schedule XIV of Companies Act, 1956 for the assets used in double shift or triple shift, shift wise
different rates are prescribed, whereas in Schedule II of Companies Act, 2013 it specifies that if an
asset is used for any time during the year for double shift, the depreciation will increase by 50%
for that period and in case of the triple shift the depreciation shall be calculated on the basis of
100% for that period. Increase in depreciation means decrease in life.
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5) Component Accounting - Note No 4 of Schedule II : (supported by Rev AS-10 as well as Ind AS – 16)

1) Useful life specified in the Schedule II to the Companies Act is for whole of the asset. Where
cost of a part of the asset is significant to the total cost of the asset and useful life of that part is
different from the useful life of the remaining asset, useful life of that significant part will be
determined separately
2) This paragraph talks about the ‘component approach’, which is in line with international
practices. It requires companies to separately depreciate parts of an asset that are significant
and have a useful life different from the useful life of the asset as a whole
3)The component approach is already allowed in current Accounting Standard 10 –
“Accounting for Fixed Assets” in Paragraphs 8.3, but it seems to be a choice of matter. Now it
seems as per the note 4 it is mandatory in Companies Act, 2013.

4) Previously companies use to charge component replacement to profit / loss account. But
now it will be separately capitalised.

Ex: Building and its Elevator can be treated as a separate component. Also Aircraft body and
its engine can be treated as 2 separate assets.

6) Transitional Effect of Schedule II – Very Important provision at the date of applicability of

Schedule II of Companies Act, 2013
From the date of the Companies Act coming into effect, the carrying amount of the asset as on
that date:
(a) Shall be depreciated over the remaining useful life of the asset according to the Act .This
means shifting from the old provisions to the new one the remaining carrying amount is to be
just spread over the remaining useful as per the new provisions on a systematic basis.
(b) After retaining the residual value, shall be recognized in the opening balance of retained
earnings where the remaining useful life of an asset is nil. It means if the remaining useful life
as per the new provisions is Nil, then the balance in the asset after keeping aside 5% on
original cost is adjusted in the opening reserves (free reserves).
7) Amortization of Service Concession Arrangement:
In certain countries construction or maintenance of infrastructure for public services (roads, bridges, water
distribution facilities) is contracted out to private-sector operators. The private sector operators are usually paid
for their services over the term of the arrangements. Such arrangements are often described as “build-operate-
transfer” (“BOT”) or a “public-to-private service concession arrangement.”

Consideration given by the grantor to the operator—if the operator renders construction or upgrade services, the
consideration received or receivable by the operator shall be recognized at its fair value. The consideration may
be treated as an intangible asset.
Recognizing an “intangible asset”—the operator shall recognize an intangible asset to the extent that it receives a
right or a licence to charge users of the public service.

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Problems and Solutions:

Problem 1) : Calculation of rate:
If the useful life is 10 years calculate the rate of depreciation assuming SLM and WDV both? Consider RV as 2% of
cost?

Solution:
Assume cost `100 and RV is 2. As per Schedule II: 98 (100-2) is known as depreciable amount.
SLM % = 98 / 10 = ` 9.8 p.a. = 9.8 / 100 = 9.8% p.a.
WDV% = 1-(Salvage / Cost)1/n = 1 – (2/100)^1/10 = 32.36% p.a

Problem 2) : Calculation of rate:

If the useful life is 6 years, Cost of the asset is ` 4,00,000, Calculate the rate of depreciation assuming SLM and
WDV both? Consider RV as 10% of cost?

Solution:
Assuming that the company provides sufficient justification for 10% RV, the rates are calculated as follows: (as
per Schedule II the maximum RV cannot exceed 5% of the cost)
SLM
Annual dep = 360000 / 6 = 60000.
Dep % = 60000 / 400000 = 15%
WDV
Dep % = 1-(Salvage / Cost)1/n = 1 – (40000/400000)^1/6 = 31.86% p.a

Problem 3) : Transitional provisions:

Edition Limited has purchased an office equipment of Rs 5,00,000 on 1/4/2012. Depreciation as per Schedule
XIV was 16.33% p.a. SLM. You are required to calculate the depreciation for the year 2014-15 by both SLM and
WDV if the useful life of the asset under Schedule II is 5 years. Assume residual value as per Schedule II.

Solution:
Balance carrying amount of the asset as on 1/4/2014 = 500000 – 500000 x 16.33% x 2 = ` 3,36,700
Balance life left out as per Schedule II = 5-2 = 3 years.
Systematic allocation over 3 years.

Depreciation for the year 2014-15:

SLM = (336700 – 5% x 500000) / 3 = ` 1,03,900
WDV % = 1 – (25000 / 336700)^1/3 = 57.95%
Depreciation = 336700 x 57.95% = ` 1,95,118

Problem 4) : Double and triple shift:

Welcome Limited has purchased Machinery for civil construction for ` 60 lakhs. The asset is not a NESD asset.
The estimated life is 15 years. And the company follows SLM method of depreciation. You are required to
calculate the depreciation for the year 2014-15 assuming the asset is used for (a) Single shift, (b) Double shift,
(c) Triple shift. Assume residual value as per Schedule II.

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Solution:
First for Single shift:
SLM
Annual dep = 60 lakhs x 95%/ 15 = 3.8 lakhs p.a.
Dep % = 3.8 / 60 = 6.33%

Double shift:
Dep % = 6.33% x 1.5 = 9.50%. Depreciation = 60 lakhs x 9.5% = ` 5.7 lakhs

Triples shift:
Dep % = 6.33% x 2 = 12.67%. Depreciation = 60 lakhs x 12.67% = ` 7.60 lakhs

Problem 5) : Revenue based amortisation:

Buddhi Developers entered into a contract with the government to construct a highway under the BOT system.
Buddhi Dev construct the infrastructure for 2 years and will acquire the rights to collect toll charges from the
vehicles running on the highway. Construction costs estimated including profits is ` 5000 lakhs
You are required to calculate the annual amortization:
Suppose the service construction period is 6 years. Estimated revenue is given:
# is actual revenue (` in lakhs)
Year Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
1 #1000
2 1000 #1050
3 1100 1050 #1100
4 1100 1050 1100 #1105
5 1100 1050 1100 1105 #1110
6 1100 1050 1100 1100 1110 #1120

Amortization for the first year = (5000 x 1000 / 6400) = ` 781.25 lakhs
Amortization for the second year = (5000 x 2050 / 6250) = ` 1640.
But 781.25 is already recorded. So in the second year amortization will be = 1650-781.25 = ` 858.75lakhs.
Amortization for the third year = (5000 x 3150 / 6450) = ` 2442.
But 1640 is already recorded. So in the third year amortization will be
= 2442 – 1640 = ` 802lakhs. Similarly we calculate for other years.

AS-10 (Revised) related to Depreciation :

1) Component Accounting : Same as Schedule II

2) Accounting Treatment of Depreciation:
Generally Depreciation is to be recognised in the statement of profit and loss unless.
If the Asset under consideration is used to manufacture / develop another PPE / Intangible FA then such
Depreciation charge for a period is to be capitalized.
If the Asset under consideration is used to produce goods then Depreciation is to be included in the costs of
conversion of inventories (see AS 2).

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3) Change in an accounting estimate: The residual value and the useful life of an asset 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 in accordance with AS 5, Net Profit or Loss for the Period, Prior Period
Items and Changes in Accounting Policies.

4) Mandatory Depreciation: Depreciation is recognised even if the fair value of the asset exceeds its carrying
amount, as long as the asset’s residual value does not exceed its carrying amount. Repair and maintenance of an
asset do not negate the need to depreciate it.

5) Commencement of Depreciation: 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.

6) Cessation of Depreciation: 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. Therefore, depreciation does
not cease when the asset becomes idle or is retired from active use (but not held for disposal) unless the asset is
fully depreciated. However, under usage methods of depreciation, the depreciation charge can be zero while
there is no production.

7) Useful life: The useful life of an asset is defined in terms of its expected utility to the enterprise. The asset
management policy of the enterprise may involve the disposal of assets after a specified time or after
consumption of a specified proportion of the future economic benefits embodied in the asset. Therefore, the
useful life of an asset may be shorter than its economic life. The estimation of the useful life of the asset is a
matter of judgement based on the experience of the enterprise with similar assets.

6) Land and buildings are separable assets and are accounted for separately, even when they are acquired
together. With some exceptions, such as quarries and sites used for landfill, land has an unlimited useful life and
therefore is not depreciated. But after introducing the concept of component accounting even Building can be
further divided into 2 sub – assets for depreciation.

7) Depreciation on dismantling / restoration : If the cost of land includes the costs of site dismantlement, removal
and restoration, that portion of the land asset is depreciated over the period of benefits obtained by incurring
those costs. In some cases, the land itself may have a limited useful life, in which case it is depreciated in a
manner that reflects the benefits to be derived from it.

8) Change in the Depreciation Method: Change in the method of depreciation is to be accounted for as a change
in an accounting estimate in accordance with AS 5.
Note: Remember as per pre revised AS-6 backed by AS-5 Change in the method of depreciation was change in
accounting policy.

Other aspects of AS-10 (revised)

Changes in Existing Decommissioning, Dismantle, Restoration (DDR) and Other Liabilities
For Cost Model: Any change in DDR due to change in liability, change in even PV Factor the amount is to be
adjusted in the PPE itself. But if the revision in liability reduces the carrying amount of assets more than the
balance then the difference is to be transferred to P/L account.

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CA – FINAL MAHESH TUTORIALS COMMERCE

Problem: Gravity Limited purchased an equipment for ` 45,00,000 including taxes as on today. The plant will be
removed / sold after the expiry of its useful life of 5 years. The initial estimates of the dismantle costs worked out
to ` 3,00,000. Pass Journals for various years assuming the risk free rate for a 5 year t-bill is 7% and depreciation
method SLM with no salvage..
Year Carrying amt Depreciation Unwinding of PV of Liability
Discount
0 47,13,896 - - 2,13,896
1 37,71,117 9,42,779 14,973 2,28,869
2 28,28,338 9,42,779 16,021 2,44,890
3 18,85,559 9,42,779 17,143 2,62,032
4 9,42,779 9,42,779 18,342 2,80,374
5 0 9,42,779 19,626 3,00,000

Suppose the final Dismantle cost revises to ` 3,40,000 at the end of 3rd year. Pass relevant journals for 4th year.

Solution:
Now the PV of 340000 @7% = 340000 (1+0.07) 2 = 2,96,969

Finance Cost a/c Dr 17,143 see table above

Plant a/c Dr 17,794 balancing fig
To Provision for Dismantle costs a/c 34,937 (296969-262032)

Depreciation a/c Dr 9,48,710 (9,42,779+5,931) 5931 = 17797/3

To Plant a/c 9,48,710

For Revaluation Model: Any change in DDR due to change in liability, change in even PV Factor the amount is to
be adjusted in the Revaluation Reserves.

Impairment of PPE: To determine whether an item of property, plant and equipment is impaired, an enterprise
applies AS 28. Impairment of Assets. AS 28 explains how an enterprise reviews the carrying amount of its assets,
how it determines the recoverable amount of an asset, and when it recognises, or reverses the recognition of, an
impairment loss (Please refer AS-28).

Compensation for Impairment

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.

Problem:
Customerry P Ltd has impaired its Volvo Bus by ` 2,34,000 last year due to an accident. A suit was filed by the
company for compensation. The court declared a compensation of ` 2,00,000. Account for the compensation of
impairment.
Solution:
Cash / Compensation receivable a/c Dr 2,00,000
To Profit / loss account 2,00,000

Retirements
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 recognized
immediately in the statement of profit and loss.

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Derecognition
The carrying amount of an item of property, plant and equipment should be derecognised
(a) on disposal; or
(b) when no future economic benefits are expected from its use or disposal.
The disposal of an item of property, plant and equipment may occur in a variety of ways (e.g. by sale, by entering
into a finance lease or by donation). In determining the date of disposal of an item, an enterprise applies the
criteria in AS 9 for recognising revenue from the sale of goods. AS 19, Leases, applies to disposal by a sale and
leaseback.

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 (unless AS 19, Leases, requires otherwise on a
sale and leaseback)- here it is deferred.
Gains should not be classified as revenue, as defined in AS 9, Revenue Recognition.

Assets held for rentals / sale: However, an enterprise that in the course of its ordinary activities, routinely sells
items of property, plant and equipment that it had held for rental to others should transfer such assets to
inventories at their carrying amount when they cease to be rented and become held for sale. The proceeds from
the sale of such assets should be recognised in revenue in accordance with AS 9, Revenue Recognition.

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Financial Reporting 27 Accounting Standards