Depreciation Under AS 10 and Intangible Assets Under AS 26

Every asset used by a business loses value over time. Machinery wears out, computers become outdated and software or licences may have a limited period of use. Depreciation and amortisation help businesses spread these costs across the periods in which the assets generate revenue.

However, book depreciation and tax depreciation are calculated differently. This guide explains the accounting treatment under AS 10, the treatment of intangible assets under AS 26 and the applicable tax position in 2026.

Which Accounting Standard Applies?

The applicable standard depends on the accounting framework followed by the company:

Therefore, AS 10 should not be confused with Ind AS 10. Ind AS companies account for property, plant and equipment under Ind AS 16, while intangible assets are covered by Ind AS 38. ICAI’s current study material separately identifies Ind AS 16 and Ind AS 38 as the applicable Ind AS standards for these assets. [1]

AS 10: Property, Plant and Equipment

AS 10 deals with the accounting treatment of property, plant and equipment, commonly known as PPE.

PPE includes tangible assets that:

• Are held for producing or supplying goods or services, rental or administrative purposes.
• Are expected to be used for more than one accounting period.
• Provide future economic benefits to the business.

Examples include buildings, machinery, computers, furniture, office equipment and vehicles.

When Is an Asset Recognised Under AS 10?

An item should be recognised as property, plant and equipment when:

• Future economic benefits from the asset are expected to flow to the business.
• The cost of the asset can be measured reliably.

Low-value items that are not material may be charged directly as an expense based on the company’s accounting policy.

What Is Included in the Cost of PPE?

The initial cost of an asset generally includes:

• Purchase price after deducting discounts and rebates.
• Import duties and non-refundable taxes.
• Transportation, installation and testing costs.
• Professional fees directly connected with the asset.
• Estimated dismantling, removal or site-restoration obligations, where applicable.

General administrative expenses, abnormal wastage and costs incurred after the asset becomes ready for use are normally not capitalised.

Measurement After Recognition

A company may use either of the following models for an entire class of assets:

Cost model: The asset is carried at cost less accumulated depreciation and impairment losses.

Revaluation model: The asset is carried at its revalued amount less subsequent depreciation and impairment, provided its fair value can be measured reliably.

The selected policy should be applied consistently to the complete class of PPE and not only to selected assets.

How Is Depreciation Calculated?

Depreciation is the systematic allocation of an asset’s depreciable amount over its useful life.

The depreciable amount is calculated as:

Cost of asset − Residual value

The three main inputs are:

• Cost: The total amount capitalised as part of the asset.
• Residual value: The expected amount recoverable at the end of its useful life.
• Useful life: The period during which the asset is expected to be available for use.

Depreciation begins when the asset is available for its intended use, even if actual commercial use starts later.

Common Depreciation Methods

A company should select a method that reflects how the asset’s economic benefits are consumed.

• Straight-Line Method: An equal amount of depreciation is charged every year.
• Written-Down Value Method: A fixed percentage is applied to the asset’s reducing carrying value.
• Units-of-Production Method: Depreciation is based on actual production or usage.

The method should be applied consistently unless the expected consumption pattern changes.

Example of Straight-Line Depreciation

Suppose machinery costs ₹10,00,000, has a residual value of ₹50,000 and a useful life of five years.

Annual depreciation will be:

(₹10,00,000 − ₹50,000) ÷ 5 = ₹1,90,000 per year

Component Accounting

If a significant part of an asset has a useful life different from the remaining asset, that component should be depreciated separately.

For example, the engine of specialised machinery may require replacement earlier than the main structure. In such a case, the engine and the remaining machinery should be accounted for separately.

Review of Useful Life and Residual Value

The useful life, residual value and depreciation method should be reviewed at least at every financial year-end. A change is treated prospectively as a change in accounting estimate.

AS 10 specifically requires this annual review. [2]

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Depreciation Under Schedule II of the Companies Act, 2013

Schedule II provides indicative useful lives for different categories of assets.

Some commonly used useful lives are:

The residual value should ordinarily not exceed 5% of the asset’s original cost.

A company may use a different useful life or residual value if it has a valid technical basis. However, the difference and its justification should be disclosed in the financial statements.

For double-shift use, depreciation generally increases by 50% for the relevant period. For triple-shift use, it generally increases by 100%, except for assets marked as no extra-shift depreciation.

AS 26: Intangible Assets

An intangible asset is an identifiable, non-monetary asset without physical substance.

Common examples include:

• Computer software.
• Patents and copyrights.
• Trademarks.
• Licences and franchise rights.
• Technical know-how.
• Designs and formulas.

An intangible asset is recognised only when the business controls the asset, future economic benefits are probable and its cost can be measured reliably.

Separately Acquired Intangible Assets

A separately purchased intangible asset is initially recognised at cost. This may include:

• Purchase price.
• Import duties and non-refundable taxes.
• Legal or professional fees directly attributable to the acquisition.
• Costs incurred to make the asset ready for use.

Internally Generated Intangible Assets

Expenditure on an internally generated project is divided into two phases.

• Research phase: Research expenditure is recognised as an expense when incurred because the business cannot yet demonstrate that an identifiable asset will generate future economic benefits.
• Development phase: Development expenditure may be capitalised only when the company can demonstrate technical feasibility, intention and ability to complete the asset, probable future benefits, availability of resources and reliable measurement of expenditure.

Internally generated brands, publishing titles, customer lists and similar items are generally not recognised as intangible assets.

Amortisation Under AS 26

Amortisation is the systematic allocation of an intangible asset’s depreciable amount over its useful life.

It begins when the asset becomes available for use. The amortisation method should reflect the pattern in which economic benefits are consumed. If that pattern cannot be determined reliably, the straight-line method is normally used.

AS 26 carries a rebuttable presumption that the useful life of an intangible asset will generally not exceed 10 years. A longer life may be used when supported by persuasive evidence.

The residual value is normally assumed to be zero unless:

• A third party has committed to purchase the asset at the end of its useful life; or
• An active market exists and is expected to continue.

The company should also review the asset for impairment when indicators suggest that its carrying value may not be recoverable.

Accounting Depreciation vs Tax Depreciation

Book depreciation and tax depreciation serve different purposes and can therefore produce different amounts.

The difference between book depreciation and tax depreciation may create a deferred tax asset or deferred tax liability in the financial statements.

2026 Tax Update for Depreciation

From 1 April 2026, tax depreciation is governed by the Income-tax Act, 2025 read with the Income-tax Rules, 2026. The new legislation replaced the Income-tax Act, 1961. [3]

Tax depreciation continues to be calculated using prescribed blocks of assets. Commonly applicable rates include:

Eligible intangible assets can include know-how, patents, copyrights, trademarks, licences, franchises and similar commercial or business rights. Under the 2026 framework, the earlier acquisition-date restriction for eligible intangible assets has been removed.

However, goodwill is not eligible for tax depreciation.

If an eligible asset is put to use for less than 180 days during the tax year, only 50% of the normal depreciation may generally be claimed for that year.

Tax rates and eligibility should be checked against the asset’s exact nature and the latest prescribed rules before filing the income-tax return.

Important Disclosures

For each class of PPE and intangible assets, financial statements should disclose relevant information such as:

• Measurement basis used.
• Depreciation or amortisation method.
• Useful lives or applicable rates.
• Gross carrying amount.
• Accumulated depreciation, amortisation and impairment.
• Additions, disposals and other movements during the year.
• Revaluation details, wherever applicable.
• Reasons for using a useful life different from Schedule II.

Maintaining an accurate fixed asset register helps support these disclosures and reduces differences during audit and tax assessment.

Conclusion

Correct depreciation and amortisation help businesses report their assets, profits and taxable income accurately. Since book depreciation and tax depreciation follow separate rules, both calculations should be maintained and reconciled carefully.

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