AS 6 – DEPRECIATION ACCOUNTING

GROUP MEMBERS:

1.AISWARYA K - BMC051902
2.RAHUL RAJ K - BMC051932

DEPARTMENT OF COMMERCE AND

INTERNATIONAL BUSINESS,
CENTRAL UNIVERSITY OF KERALA,
THEJASWINI HILLS, PERIYE,
KASARAGOD, KERALA.

ACCOUNTING STANDARD
Accounting as a ' language of business '
communicates the financial results of an
enterprise to various stakeholders by means
of financial statements. If the financial
accounting process is not properly regulated,
there is possibility of financial statements
being misleading, tendentious and providing
a distorted picture of the business, rather
than the true state of affairs. In order to
ensure transparency, consistency,
comparability, adequacy and reliability of
financial reporting, it is essential to
standardize the accounting principles and
policies. Accounting standards provide a
basis to resolve potential financial conflicts
between various groups. Accounting
standards are needed to ensure uniformity in
the preparation and presentation of financial
statements. Accounting standards provide
framework and standard accounting policies
so that the financial statements of different
enterprises become comparable.

Concept of Depreciation

Every business acquires some non-trading

fixed assets. These fixed assets are used in
the business for facilitating its trading
activities and enhancing its revenue earning
capacity. These assets are basically
purchased for the business with the intention
of permanent use and not for resale.

All fixed assets except the value of land

decreases with the passage of time. The
value of these assets decrease each year.
Such gradual reduction or decrease in the
value of fixed assets for the purpose of
earning revenue is called depreciation.
Depreciation is closely related with the
determination of profit or loss for the period.
Unless depreciation is charged to the
revenues, the true income of the business
cannot be ascertained properly. As such,
depreciation is a revenue expense.
Fixed assets are also called depreciable
assets.

The characteristics of depreciable assets are

as follows:

* The expected life of the asset is more than

one accounting period.

* Those assets have a limited useful life.

* Those assets are held by the business for

use in production of goods and services.

* Those assets are not for the purpose of sale

in the ordinary course of business.

The cost of fixed asset indicates 'the price

for the future service of the assets'. It is
necessary to spread its cost over a number of
years during which benefit of the asset is
received. This process of allocating the cost
of fixed assets is termed as 'depreciation'.

Meaning of Depreciation

In general words, depreciation is the

reduction in the value of an asset due to
usage, passage of time, wear and tear,
technological out dating or obsolescence,
depletion, inadequacy, decay or other such
factors.

In accounting, depreciation is a term used to

describe any method of attributing the
historical or purchase cost of an asset across
its useful life, roughly corresponding to
normal wear and tear. It is mostly used when
dealing with assets of a short, fixed service
life, and which is an example of applying
the matching principle as per generally
accepted accounting principles.

Depreciation is calculated on all depreciable

assets which can be defined as those which
have a useful life for more than one
accounting period but is limited and are held
by an enterprise for use in the production or
supply of goods and services. Examples of
depreciable assets are machines, plants,
furniture, buildings, computers, trucks, vans,
equipment, etc. Moreover, depreciation is
the allocation of 'depreciable amount' which
is the 'historical cost' or other amount
substituted for historical cost less estimated
salvage value.

Depreciation has significant effect in

determining and presenting the financial
position and results of operations of an
enterprise. Depreciation is charged in each
accounting period by reference to the extent
of the depreciable amount.

In this way, depreciation is an allocation of

the cost of assets over their useful life. A
systematic procedure of for allocating the
cost over the periods of its useful life in a
rational manner is called depreciation
accounting.

Features of Depreciation

Following are the main features of

depreciation:

1. Depreciation is decline in the book value

of fixed assets.

2. Depreciation includes loss of value of

assets due to passage of time, usage or
obsolescence.
3. Depreciation is a continuing process till
the end of the useful life of assets.

4. Depreciation is an expired cost and hence

must be deducted before calculating taxable
profits.

5. Depreciation is a non-cash expense. It

does not involve any cash flow.

6. Depreciation is the process of writing-off

the capital expenditure already incurred.

Objectives of Providing Depreciation

Need or objectives of providing depreciation

can be studied as follows:
 1) To Replace Fixed Assets

The main objective of charging depreciation

is to accumulate adequate fund to replace
old asset with the new one after the useful
life.

2) To Reveal True Financial Position

Depreciation is charged to fix an asset which

helps to show the current value of the asset.
Therefore, it helps to show true financial
position (assets and liabilities position) of
the business.

3) To Reduce Tax Liability

Amount of depreciation is deducted from the
operational profit of the business which
reduces taxable liability of the firm.

4) To Determine True Profit

Depreciation (the decline in the book value

of fixed assets) is charged to revenue like
other operating expenses. So, it helps to
determine true profit of the firm.

5) To Determine Cost Of Production

Depreciation should be charged to fixed

assets like machinery and plants in order to
determine true or actual cost of production.
 Causes of Depreciation

Depreciation can be easily defined as a

reduction in the carrying amount of a fixed
asset. Depreciation is equated with a value
of consumption of the asset for a specific
period. Over the span of an asset, over
which it is considered usable, depreciation
brings down the value of the asset to a
salvage value.

This salvage value is the sum of money that

is expected to accrue to the owner if he
makes a sale of the asset. Or it can be said to
be the scrap value that he gets on disposal of
the asset.
Following are the causes of depreciation:

1 .Wear and Tear of the Asset

Every machinery or tool is bound to undergo

wear over a period of time. There will be
parts that may need replacing or repairing.
Usually, such assets have a fixed span of
life, after which, they need to be scrapped.
This wear and tear of the asset must be
accounted for in financial terms, hence
depreciation.

2. Perishability of Inventory

Items such as raw material and inventory,

undergone deterioration over a quick span of
time. This is faster in relation to a fixed
asset, which normally lasts for a few years at
least. This perishability of assets is a point
of consideration for depreciation accounting.

3. Usage Right Expiration

Some assets such as software and licenses

have a typical span over which it can be
used. As soon as this time span finishes, the
owner has to give up using the asset. So the
depreciation of this asset must be done over
time, it cannot just be written off on the day
of expiration.

4. Obsolescence
Another cause of depreciation is the absolute
nature of certain assets. Over a period of
time, every asset loses its novel value. A
new alternative can always be developed for
replacing the asset and its functions.

Need to Comply with Accounting

Standards

As per the guidelines set down in the

standard of accounting, a firm needs to
follow the matching concept. This means
that the funds for replacing the asset are set
aside at regular intervals. Also, the expense
related to each period is charged to that
period simultaneously.
It is mandatory to provide depreciation as
per Accounting standard 6 and the
Companies Act, 2013. Not providing
depreciation during a year is also a violation
of the accounting standard and the
provisions stated therein. Further, providing
for depreciation ensures that the accounts of
a firm present a true and fair view of the
financial status of the firm.

Factors Affecting Depreciation:

As already stated, depreciation is not an

attempt to record the changes in the market
value of the asset but a systematic allocation
of the total cost of depreciable asset (capital
expenditure) to expenses (revenue
expenditure) over the useful life of the asset
because market value of some assets may
increase in short run but even then the
depreciation process continues. Based on the
matching principle a reasonable portion of
capital expenditure (i.e. the cost of the asset)
should be charged to revenue during the
useful life of an asset.

The calculation of amount of depreciation

expense for an accounting period is affected
by the:

(i) Actual cost of the asset

 (ii) Estimated useful life of the asset

(iii) Estimated residual value of the asset.

It is worth mentioning here that out of three

factors, two factors are based on just
estimation and only one factor is based on
actual. Thus, calculation of depreciation
expense is just an estimated loss in value of
assets and not the real and exact decrease in
value of an asset.

Now we shall move on to discuss each of

the above factors in detail:

1. Actual Cost of the Asset:

Actual cost or historical cost means the
acquisition cost of the asset and includes all
incidental expenses which are necessary to
bring the asset to its present condition and
location. Examples of such expenses are
installation charges, freight inwards or
expenses incurred for improvements of such
assets and which are of capital nature.

2. Estimated Useful Life of the Asset:

Estimated useful life of the asset is either:

(i) The period over which a depreciable
asset is expected to be used by the enterprise
or

(ii) The number of production or similar

units expected to be obtained from the use of
the asset by the enterprise.

3. Estimated Residual or Scrap Value of the

Asset:

Residual or scrap value is the expected value

which may be realized when the asset is sold
or exchanged at the end of its estimated
useful life. When residual value is
significant, it should be taken into
consideration for computing depreciation.
However, an insignificant residual value can
be ignored for computation of depreciation.

Depreciation is a continuous process, but we

don’t record depreciation daily. Actually, the
total amount of depreciation to be charged
on any asset is an advance expenditure
which has been paid by the enterprise at the
time of acquisition of such asset.

METHODS OF PROVIDING
DEPRECIATION
The following are the various methods for
providing depreciation:

1. Straight Line or Fixed Percentage on

Original Cost or Fixed Installment
Method.
2. Written Down Value or Fixed Percentage
on Diminishing Balance or Reducing
Installment Method.
3. Insurance Policy Method.
4. Sum of the Digits Method.
5. Revaluation Method.
6. Depletion Method.
7. Machine Hour Rate Method.
 1. Straight Line Method

Under this method, a fixed percentage of

original cost is written off the asset every
year. Thus, if an asset costs Rs. 20,000 and
10 percent depreciation were considered
adequate, Rs. 2,000 would be written off
every year. The amount to be written off
every year is arrived at as under:

= (Cost – Estimated Scrap Value) /

Estimated Life

The period for which the asset is used in a

particular year should also be taken into
account. This method is simple in
calculation and also in such a case, the
charge to the Profit and Loss Account is
uniform every year. This method is useful
when the service rendered by the asset is
uniform from year to year. It is desirable,
when this method is in use, to estimate the
amount to be spent by way of repairs during
the whole life of the asset and provide for
repairs each year at the average actual
repairs.

2. Written Down Value Method

Under this method, the rate or percentage of
depreciation is fixed, but it applies to the
value at which the asset stands in the books
in the beginning of the year. In other words,
under this method, a fixed percentage is
written off every year on the reduced
balance of the asset. Thus, the percentage of
depreciation is not applied to the original
cost but only to the balance, which remains
after charging depreciation in the beginning
of a year. The percentage of depreciation
remains fixed for all the years of the
working life of an asset but the actual
amount of depreciation written off every
year goes on decreasing with the reduction
in the value of the asset.

3. Insurance Policy Method or

Capital Redemption Policy Method

Under this method the business takes a

policy from an insurance company. The
amount of the policy is such that it is
sufficient to replace the asset when it is
worn out. Cash, which is equal to the
amount of depreciation, is paid by way of
premium every year. The amount goes on
accumulating with the insurance company at
a certain rate of interest and is paid back to
the insured at the maturity of the policy. The
amount so made available by the insurance
company is used for purchasing a new asset.
This method to a great extent is similar to
sinking fund method, but no doubt the
procedure is a little different. In this method,
instead of buying securities, the insurance
policy is taken and premium is paid every
year. Company, that receives premium,
allows a small interest on compound basis.

This method is a more suitable device for

ensuring the availability of cash to replace
the asset. The advantage under this system is
that the company need not worry whether
the investments as under the Depreciation
Fund Method, will be sold at best prices or
not.

If an insurance policy is taken, it serves two

purposes. Firstly, it insures the asset.
Secondly, the insurance company will pay
the stipulated amount to enable the company
to replace assets. This method is more
expensive as the insurance company has to
keep its margin of profits. It is suitable for
losses where the life of the asset is definitely
known. It yields a very low rate of interest.
It makes no adjustments for price-level
changes.
 4. Sum of the Digits Method
Under this method, amount of the
depreciation to be written off each year is
calculated by the following formula:

= Remaining Life of the Asset (including the

Current Year) / Sum of all the Digits of the
Life of the Asset in Years X Cost of the
Asset

Suppose the life of an asset costing Rs.

50,000 is 10 years. The sum of all the digits
from 1 to 10 comes to 55 i.e.,
10+9+8+7+6+5+4+3+2+I = 55. The
depreciation to be provided in the first year
will be:
= 10 / 55 x 50,000 or Rs. 9,091

In the second year, it will be:

9 /55 x 50,000 or Rs. 8,181

This method is similar to the Written Down

Value Method described earlier.

5. Revaluation Method

This method is used only in case of small

items like cattle (Livestock) or loose tools
where it may be too much to maintain an
account of each single item. The amount of
depreciation to be written off is determined
by comparing the value at the end of the
year (valuation being done by someone
having expert knowledge of the valuation of
the asset) with the value in the beginning.

Suppose on 1st April 2,007 the value of

loose tools was Rs. 10,000 and during the
year Rs. 30,000 worth of tools were
purchased. Now if at the end of the year, the
loose tools are considered to be worth only
Rs. 25,000 the depreciation comes to Rs.
15,000 i.e. Rs. 10,000+ Rs. 30,000 – Rs.
25,000.

6. Depletion Method
The depletion method is used in case of
mines, quarries, etc., where an estimate of
total quantity of output likely to be available
should be available. Depreciation is
calculated per ton of output.

For example, if a mine is purchased for

Rs.20,00,000 and it is estimated that the
total quantity of mineral in the mine is
5,00,000 tons, the depreciation per ton of
output comes to = 20,00,000 / 5,00,000 =
Rs. 4.

If the output in the first year is 30,000 then

the depreciation will be 30,000 x Rs.4 = Rs.
1,20,000, in the second year, the output may
be 50,000 tons; the depreciation to be
written off will be Rs.2,00,000 i.e., 50,000 x
Rs.4

7. Machine Hour Rate Method

This is more or less like the depreciation

method. Instead of the usual method of
estimating the life of a machine in years, it is
estimated in hours. Then, an accurate record
is kept recording the number of hours each
machine is run and depreciation is calculated
accordingly.

For example, the effective life of a machine

may be 30,000 hours. If the cost of the
machine is Rs.4,50,000, the hourly
depreciation is

= 4,50,000 / 30,000 = Rs. 15.

The depreciation for a particular year during

which the machine runs for 2,500 hours will
be 2,500 x Rs.15 = Rs. 37,500.

Change in Method of Depreciation

Accounting policies and principles need to

be consistently applied while recording the
financial transactions. This is the Principle
of Consistency. Any change in the method of
depreciation implies a change in accounting
estimate. Thus, there should be valid reasons
for a change in method of depreciation.

Change in Method of Depreciation

At the end of each financial year,

management should review the method of
depreciation. When there is a significant
change in the pattern of the future economic
benefits from the asset then the method of
depreciation should also be changed.

As per the Accounting Standard 1-

Disclosure of Accounting Policies, the
change in the method of depreciation is a
change in the accounting estimate. Thus, it
requires quantification and full disclosure in
the footnotes. Also, the justification and
financial effects of the change needs to be
disclosed.

Thus, the method of depreciation can be

changed without retrospective effect or with
retrospective effect. Without retrospective
effect means no adjustment will be made for
past entries and only in the future
depreciation shall be charged by the new
method. While with retrospective effect
implies that the amount of depreciation to be
charged is adjusted from the date of
purchase of the asset.
The depreciation method selected should be
applied consistently from period to period.
The change in method of depreciation
should be made only if;
* The adoption of the new method is
required by statute; or
* For compliance with an accounting
standard; or
* If it is considered that change would
result in a more appropriate preparation of
financial statement; or
* When there is change in method of
depreciation, depreciation should be
recalculated in accordance with the new
method from the date of the assets coming
into use.

* The deficiency or surplus arising from

such recomputation should be adjusted in
the year of change through profit and loss
account.

* Such change should be treated as a change

in accounting policy and its effect should be
quantified and disclosed.

The useful lives of major depreciable assets

may be reviewed periodically. Where there
is a revision of the estimated useful life, the
unamortized depreciable amount should be
charged over the revised remaining useful
life.

Any addition or extension which becomes

an integral part of the existing asset should
be depreciated over the remaining useful life
of that asset.

The depreciation on such addition may also

be applied at the rate applied to the existing
asset. Where an addition or extension retains
a separate identity and is capable of being
used after the existing asset is disposed of,
depreciation should be provided
independently on the basis of estimate of its
own useful life.

Where the historical cost of a depreciable

asset has undergone a change due to
increase or decrease in the long term
liability on account of exchange
fluctuations, price adjustments, changes in
duties or similar factors, the depreciation on
the revised unamortized depreciable amount
should be provided prospectively over the
residual useful life of the asset.
This accounting standard is not applied
on the following items.

•Forests and plantations

•Wasting assets
•Research and development
expenditure
•Goodwill
• Live stock

Disclosure requirements

1] the historical cost

2] total depreciation for each class charged
during the period
3] the related accumulated depreciation
4] depreciation method used
(Accounting policy)
5] depreciation rates if they are different
from those prescribed by the statute
governing the enterprise.

Revised:
This is revised accounting standard
10 –Property, plant and Equipment
(PPE),which has replaced AS
6Depreciation and AS 10 Accounting for
fixed assets. This revision of AS 10 has
been made to be as par with
IAS and IFRS.

COMPARATIVE ANALYSIS OF
INTERNATIONAL ACCOUNTING
STANDARD (IAS-16) AND INDIAN
ACCOUNTING STANDARD (AS-
6) REGARDING DEPRECIATION
I) The revised As-6 is mandatory in respect
of accounts for periods commencing on or
after 1.4.1995 while IAS-16 has become
operative for financial statements covering
periods beginning on or after 1.1.1995. AS-6
applies ‘to all depreciable assets excepting
forests, plantations and similar regenerative
natural resources, wasting assets including
expenditure on the exploration for and
extraction of minerals, oils natural gas and
similar non-regenerative resources,
expenditure on research and development,
goodwill, and live stock. AS-6 also does not
apply to land unless it has a limited useful
life. On the other hand, IAS-16 covers
property (excepting land), plant and
equipment. Depreciation accounting
revolves around three factors depreciable
amount, expected useful life and estimated
residual value of the depreciable asset.
Differences exist between AS-6 and IAS-16
in the determination of these three factors.
There are also some differences in the
disclosure norms as prescribed by AS-6 and
IAS-16.

II) Depreciable amount is the historical cost

of a depreciable asset or other amount
substituted for historical cost in the financial
statements less the estimated residual value.
Historical cost is the money spent on a
depreciable asset in connection with its
acquisition, installation and commissioning
as well as for additions to or improvement
thereof. The depreciable amount, under AS-
6, is taken as the asset's historical cost. The
historical cost may, however, undergo
subsequent changes as a result of increase or
decrease in long term liability oh account of
exchange fluctuations, price adjustments,
changes in duties or similar factors and in
these circumstances alone, AS-6 calls for
revaluation of depreciable assets. The
depreciation on the revised unamortized
depreciable amount should be provided
prospectively over the residual useful life of
the asset. On the contrary, IAS-16 requires
that an item of property, plant and
equipment (P. P. & E) which qualifies for
recognition as an asset should initially be
measured at its cost. Subsequently, such
asset should either be carried at its cost less
any accumulated depreciation, which is also
known as the Benchmark Treatment or, in
the alternative, may be shown at a revalued
amount, being its far value at the date of
revaluation, less any subsequent
accumulated depreciation. That is, as per
IAS-16, revaluation should be made with
sufficient regularity such that the carrying
amount does not differ materially from that
which would be determined using fair value
at the Balance Sheet date. Thus, the balance
sheet reflects the current replacement cost of
the depreciable assets under IAS-16.
Moreover, IAS-16 provides that if an item of
P. P. & E. has been revalued, then the entire
class to which the asset belongs must be
revalued (for example, all buildings, all
equipment etc.) unlike AS-6. Revaluation
increase under IAS-16, should be credited to
equity as 'revaluation surplus' unless it
reverses a revaluation decrease of the same
assets previously recognized as an expense.
Similarly, revaluation decrease should be
recognized as an expense unless it reverses a
previous credit to equity (revaluation
surplus) given in respect of the same assets.
But AS-6 requires that revaluation of
depreciable assets should be disclosed
separately in the year in which revaluation is
carried out only in the case where such
revaluation has a material effect on the
amount of depreciation.
 III) According to AS-6, if any depreciable
asset is disposed of, discarded, demolished
or destroyed, the net surplus or deficiency, if
material, should be disclosed separately. But
as per IAS-16, an item of P, P & E should be
eliminated from the Balance Sheet on
disposal or when the asset is permanently
withdrawn from use and no future economic
benefits are expected from its disposal. Also,
gain or losses arising from such retirement
or disposal as the difference between net
disposal proceeds and the carrying amount
of the asset should be recognized as income
or expense in the income statement.
IV) IAS-16 requires periodical review of the
carrying amount of P, P & E in order to
assess whether the recoverable amount (i.e.
residual value) has declined below the
carrying amount. If such a decline occurs,
the carrying amount is reduced to the
recoverable amount by way of a charge to
income. But AS-6 does not require such
comparison to be made.

V) Both AS-6 and IAS-16 prescribe that the

useful life of the depreciable assets should
be reviewed periodically and any change
should be reflected in the current period and
prospectively. But IAS-16 requires that
significant costs to be incurred at the end of
an assets useful life should either be
reflected by reducing the estimated residual
value or by charging the amount as an
expense over the life of the asset. There is
no such requirement under AS-6. The Indian
standard, on the other hand, substitute & the
word 'may1 for 'should' making the
provision discretionary.

VI) AS-6 states that a change from one

method of providing depreciation to another
should be made only if the adoption of the
new method required by statute or for
compliance with an accounting standard or
if it is considered that change would result in
a more appropriate preparation or
presentation of the financial statements of
the enterprise. But IAS-16 postulates that
the depreciation method applied to P, P & E
should be reviewed periodically and, if there
has been a significant change in the
expected pattern of economic benefits from
those assets, the method should be changed
to reflect the changed pattern. However,
both the standards treat such a change in the
method of depreciation as a change in an
accounting policy and require it to be
disclosed separately. IAS16 requires the
disclosure of change in depreciation rate
also. But AS-6 did not take into account this
aspect.
VII) As regards disclosure norms, both AS-
6 and IAS-16 require the financial
statements to disclose the depreciation
methods used, the gross carrying amount of
each class of depreciable assets, and the total
depreciation attributable to each such
category for the period, the useful lives and
residual value of the assets the depreciation
rates used and the like. In addition, IAS-16
requires the financial statements to reconcile
the carrying amount at the beginning and
end of the period by way of showing
additions, disposals, revaluations,
depreciation and other movements. Besides,
IAS-16 also requires the disclosure of the
basis used to revalue assets, the effective
date of revaluation, restrictions as the title of
depreciable assets, pledged as security for
liabilities and the like. Thus, in the context
of depreciation accounting IAS-16 makes
the financial statements more transparent
than AS-6. Discussion suggests that it
would be a good move.
Applicability of AS 10 Property, Plant
and Equipment
AS 10 are to be applied in accounting for
property, P&E (Plant and Equipment) and
this standard are not applicable to:
(a) Biological assets which are related to
agricultural activities except for bearer
plants. The Standard is applicable to bearer
plants, however, it doesn’t apply to the
produce on bearer plants; and
(b) Wasting assets which include mineral
rights, expenses related to exploration for
and extraction of oil, minerals, natural gas
and other non-regenerative resources.

Recognition of Asset under AS

10 Property, Plant and Equipment
The cost of property and P&E should be
recognized as an asset only if:
(i) It is apparent that the future economic
benefits related to such asset would flow to
the business; and
(ii) The cost of such asset could be reliably
measured.

Measurement of cost of the asset

An enterprise can select the revaluation
model or the cost model as the accounting
policy and employ the same to the entire
class of its properties and P&E. According
to the cost model, after recognizing the asset
as an item of property or plant and
equipment, it should be carried at the cost
less the accumulated depreciation and the
accumulated impairment losses (if any). As
per revaluation model, once the asset is
recognized and its fair value could be
measured reliably, then it must be carried at
the revalued amount, which is the fair value
of such asset at the date of the revaluation as
reduced any following accumulated
depreciation and accumulated impairment
losses (if any). Revaluations must be done at
regular intervals for ensuring that the
carrying amount doesn’t differ much from
that which would be determined using the
fair value at balance sheet date.

Depreciation under AS 10 Property, Plant

and Equipment
As per the standard, depreciation charge for
every period must be recognized in the P/L
Statement unless it’s included in carrying the
amount of any another asset. Depreciable
amount of any asset should be allocated on a
methodical basis over the useful life of the
asset.
Every part of property or P&E (Plant and
Equipment) whose cost is substantial with
respect to the overall cost of the item must
be depreciated separately.
The standard also prescribes, that the
residual value and useful life of an asset
must be reviewed at the end of each
financial year and, in case the expectations
vary from the previous estimates, changes
must be accounted for as changes in
accounting estimate as per Accounting
Standard 5 – Net Profit or Loss for the
Period, Prior Period Items and Changes in
Accounting Policies.
The method of depreciation employed must
reflect the pattern of future economic
benefits of the asset consumed by an
enterprise. Various depreciation methods
could be used for allocating the depreciable
amount of an asset on a methodical basis
over the useful life of the asset. The methods
include SLM (Straight-line Method),
diminishing balance method or units of
production method.
COMPARISON ON GAAP, IFRS and Ind AS

Topic Indian GAAP IFRS Ind AS

Property, Plant AS 6 – Depreciation IAS 16 – Property, Ind AS 16 – Property,
and Equipment Accounting
– primary Plant and Equipment Plant and Equipment
literature
AS 10 – Accounting for
Fixed
Assets IFRIC 1 – Changes in Ind AS 16 – Appendix A
Existing –
Decommissioning, Changes in Existing
Note: An exposure draft Restoration Decommissioning,
of and Similar Liabilities Restoration
AS 10 (Revised), and Similar Liabilities
Property, Plant IFRIC 20 – Stripping
and Equipment has been Costs in the
issued
by the ICAI. The Production Phase of a Ind AS 16 – Appendix
discussion below is Surface Mine B – Stripping Costs in
based on AS 10 as the Production Phase
notified under the of a Surface Mine
Companies (Accounting
Standards) Rules,
2006.
Property, Plant and There is no exemption in Property under Similar to IFRS.
AS 10 for construction or
Equipment – scope development for future
property under use as
development for
 future use as investment
property.
Property, plant and Machinery spares are
usually
equipment – major charged to the profit and
spare loss
parts statement as and when
consumed.
However, if such spares
can be
used only in connection
with an
item of fixed asset and
their use is
expected to be irregular, it
may be
appropriate to allocate the
investment property is
excluded
from the scope of IAS 16
and
is within the scope of IAS
40,
Investment Property.
Biological assets that meet
the
definition of a bearer plant
i.e.
a living plant that is used
in the
production or supply of
agricultural
produce, is expected to
bear
produce for more than one
period
and which will not be sold
as
agricultural produce are
included
in property, plant and
equipment
(effective from 1 January
2016 with
earlier application
permitted).
Spare parts are recognised Similar to IFRS.
in
accordance with IAS 16
when they
meet the definition of
property,
plant and equipment.
Otherwise,
such items are classified as
inventory.
 total cost
on a systematic basis over
a period
not exceeding the useful
life of the
principal item.
Property, Plant and No such specific The initial estimate of the Similar to IFRS.
requirement. costs of
Equipment – dismantling and removing
estimated the item
costs of dismantling, and restoring the site on
which it is
removing or located is required to be
restoring items included
of property, plant in the cost of the
and respective item of
equipment property plant and
equipment.

Topic Indian GAAP IFRS Ind AS

Property, Plant and Replacement cost of an Replacement cost of an Similar to IFRS.
Equipment – item of property, plant and item of property, plant
replacement costs equipment is generally and equipment is
expensed when incurred. capitalised if replacement
meets the
recognition criteria.
Only expenditure that Carrying amount
increases of items replaced is
derecognised.
the future benefits from
the
existing asset beyond its
previously
assessed standard of
performance is
capitalised.

From financial years

commencing on
or after 1 April 2015,
Schedule II mandates fixed
assets to
be componentised and
therefore,
 the position will be similar
to that
under IFRS.
Property, Plant and Costs of major inspections Cost of major inspections Similar to IFRS.
are is
Equipment – cost of generally expensed when recognised in the carrying
major incurred. amount
inspections of property, plant and
equipment as
a replacement, if
recognition criteria
are satisfied and any
remaining
carrying amount of the
cost of
previous inspection is
derecognised.
Property, Plant and No specific requirement If an entity adopts the Similar to IFRS.
on revaluation
Equipment – frequency of revaluation. model, revaluations are
revaluation required to
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 end of the
reporting
period.
Property, Plant and AS10 does are not require Property, plant and Similar to IFRS.
assets to equipment are
Equipment – be componentised and componentised and are
depreciation depreciated depreciated
separately, although it separately. There is no
states that concept of
such an approach may minimum statutory
improve depreciation
the accounting for an item under IFRS.
of fixed
asset.
REFERANCES
Websites:
https://corporatefinanceinstitute.com
https://www.toppr.com
https://www.indianaccounting.in
https://www.slideshare.net
https://www.iasplus.com

Books:
 Financial accounting-Dr.V.K. Goyal
 Fundamentals of Advanced Accounting-R.S. N Pillai
Bagavathi