DEPRECIATION AS-10 & INTANGIBLE ASSETS AS-26
AS-10 Property, Plant and Equipment
Accounting Standard 10 deals with Property, plant and equipment (PPE). The standard lays down the accounting treatment for Property, plant and equipment, it includes:
- Recognition of assets
- Ascertaining the carrying amount of the assets
- Determining the depreciation charges in respect of PPE.
Applicability of AS-10
The standard is applicable on all the PPE except
- Cases where we have another accounting standard
- Biological assets
- Wasting assets
Recognition of assets
An asset is identified as Property, plant and equipment only if:
- The future economic benefits expected to arise from such an asset would come to the business entity
- Cost of such an asset can be reliably measured
The business entity may choose to treat an item as an expense which would otherwise have been categorized under PPE. This is because the amount of such an item is not material in nature.
Determination of Cost
As per AS 10, the cost of property, plant and equipment of a business entity may include the:
- initial cost to acquire or construct an item of property, plant and equipment
- Subsequent costs of adding, replacing or servicing the property, plant and equipment so acquired
Measurement of Cost
There are two methods to calculate the carrying amount of the assets:
In this model, the cost of an item of PPE includes:
- Acquisition Cost including import duties and non-refundable purchase taxes less any trade discounts and rebates
- Costs directly associated with bringing the asset to the location as well the condition essential so as to make the asset capable of operation in a way as planned by the management.
- Costs of dismantling, removing the item and restoring the site on which the asset is located
Under the revaluation model, after the asset is recognized, an item of PPE should be carried at a revalue amount. Provided the fair value of such an item of PPE can be reliably measured.
Disclosure in Financials
Property, plant and equipment is a classified on the balance sheet of a company’s fixed assets, such as buildings, computers, furniture, land, and machinery, that are expected to be used for more than a year. PPE is shown on the balance sheet grouped together at original cost, minus net accumulated depreciation.
DEPRECIATION AND ITS OBJECTIVES
Depreciation is a charge that is allocated to an asset systematically over its useful life. The depreciation amount so charged for an asset in each period is charged in the profit and loss statement of the entity and the same is reduced from the carrying value of the asset in financials.
An entity can charge depreciation both for tax and accounting purposes.
The Objectives of Depreciation are: –
- To ascertain true profits
- To show the assets at their proper values
- To create funds for replacement of assets
- Statutory Need: Provision of depreciation is a statutory need both as per companies act and income tax act
Inputs required for calculating depreciation
Three main inputs are required to calculate depreciation:
- Useful life – this is the time period over which the entity considers the fixed asset to be productive. Beyond its useful life, the fixed asset is no longer cost-effective to continue the operation of the asset.
- Salvage value – Post the useful life of the fixed asset, the company may consider selling it at a reduced amount. This is known as the salvage value of the asset.
- The cost of the asset – this includes taxes, shipping, and preparation/setup expenses.
Types of depreciation
Some important terms
- Accumulated depreciation refers to the sum of all depreciation recorded on an asset to a specific date.
- Gross Block is the total value of all of the assets that a company owns. Any addition made to the gross block is called as capital expenditure.
- Net Block is the gross block less accumulated depreciation on assets.
- The carrying value of an asset on the balance sheet is its historical cost minus all accumulated depreciation.
Depreciation Rates and Provisions as per Companies Act 2013
- Depreciation to be calculated by considering useful life of asset, cost and residual value.
- Any method WDV or SLM can be used
- Schedule – II contains a list of useful life according to class of assets and the residual value shall not be more than five percent of the original cost of asset.
However companies are free to adopt a useful life different from what specified in Schedule II and residual value more than 5%. The financial statements shall disclose such difference and provide justification in this behalf duly supported by technical advice.
- If there is any addition to the asset or asset is sold, discarded, demolished or destroyed then the calculation is made according to the date of such event. In other words, if any asset is purchased or sold then the calculation will be made according to the date of purchase or sold i.e. date wise calculation is made.
- Under schedule II of companies Act, 2013, no separate rates/ lives are prescribed for extra shift working. Rather, it states that for the period of time and asset is used in double shift depreciation will increase by 50% and by 100% in case of triple shift working.
Useful Life of Asset as per Schedule II of Companies Act
Depreciation rates as per Income tax act
For tax purposes, depreciation schedules detailing the number of years an asset can be depreciated based on various asset classes.
AS-26 Intangible Assets* In case of Motor Vehicles used for commercial purpose the rate of depreciation is 30%.
Intangible assets mean assets, without physical substance, which are under control of entity held for use, production of goods, rendering of services and having future economic benefits.
It includes the expense incurred by the entity on scientific technical knowledge, design and implementation of new processes or systems, trademarks, computer software, licenses etc.
Applicability of AS-26
The standard is applicable on all except
- Intangible assets that are within the scope of another standard financial assets
- Rights and expenditure on the exploration for or development of minerals, oil, natural gas and similar non-regenerative resources
- Intangible assets arising in insurance enterprise from contracts with policyholders
- Expenditure in respect of termination benefits.
Recognition and initial measurement of intangible assets
An asset meets the criteria of an Intangible asset, when it is probable that the future economic benefits will flow to the enterprise and the cost of the asset can be recognised reliably. This recognition criterion applies to cost of acquiring and generating an intangible asset internally.
- Acquired intangible assets
- Self-generated intangible assets
Acquired intangible assets
- If an intangible asset is acquired separately, then it is initially measured at cost, which includes purchase price that includes import duty, non-refundable purchase taxes, after deducting trade discount and related direct cost.
- If an asset is acquired in a business combination, the cost of that asset is measured at its fair value at the acquisition date which depends on market expectations.
- When the asset is acquired free of charge or for a normal consideration, by way of government grant, then it is recognized at a nominal value or at the acquisition cost
Self-generated intangible assets
Expenditure on self-generated intangible asset is incurred in two phases.
- Research phase
Expenditure during research phase is charged to profit and loss account and is not capitalized as an intangible asset.
- Development phase
Expenditure incurred during development phase is capitalized as intangible asset till such asset is ready for use. It includes all direct expenditures related to creating, producing and making the asset ready for its intended usage from the time it meets the first recognition criteria.
Subsequent expenditure/Secondary recognition (after purchase or completion of assets) should be added to the cost of the intangible asset, when there is a probability that the expenditure will generate future economic benefits and the expenditure can be measured reliably.
Amortization of intangible assets starts when the asset is available for use. The depreciable amount of an intangible asset should be allocated on the basis of useful life. This AS adopts a presumption that the useful life of intangible assets does not exceed ten years. In some cases, it can be longer than ten years.
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