Money Bol » AS 10 http://moneybol.com Mon, 21 May 2012 12:30:22 +0000 en hourly 1 http://wordpress.org/?v=3.1.2 Fixed Assets / Property, Plant & Equipment : Differences between Indian GAAP and IFRS http://moneybol.com/fixed-assets-property-plant-equipment-differences-between-indian-gaap-and-ifrs/ http://moneybol.com/fixed-assets-property-plant-equipment-differences-between-indian-gaap-and-ifrs/#comments Thu, 15 Apr 2010 17:32:43 +0000 Praveen Bajaj http://moneybol.com/?p=537
  • Treatment Of Tangible Assets Under IFRS
  • Depriciation and Impairment – IFRS and Indian GAAP
  • Comparison of IFRS and Indian Accounting Standards
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  • Under Indian GAAP the terminology used is Fixed Assets  where as under IFRS it is termed as Property, Plant and Equipment
  • Standard IAS 16 covers Property, Plant and Equipment (PPE) where as there are 2 standards for Fixed Assets under Indian GAAP i.e. AS-10 Fixed Assets and AS-6 Depreciation
  • As per Indian GAAP subsequent expenditure related to item of fixed assets are to be capitalized only if they increase the future benefit from the existing asset beyond its previously assessed standard of performance where as under IFRS subsequent costs are evaluated on the basis of same recognition principles as that of initial cost for recognizing as item of PPE
  • Under IFRS cost of major inspections should be capitalized where as under Indian GAAP there is no specific provision for the same.
  • IFRS for PPE is based on component approach. Under this approach “Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separately” where as Indian GAAP does not mandatory require full adoption of the component approach
  • Under IFRS the residual value and useful life of an asset be reviewed at least each financial year end and if it differs from previous estimate then it is considered as change in accounting estimate where as such a review is not required under Indian GAAP
  • Change in depreciation method is considered as change in accounting estimate under IFRS where as under Indian GAAP it is considered as change in accounting policy
  • IFRS requires an entity to choose either the cost model or the revaluation model as its accounting policy and to apply that policy to entire class of PPE. Kindly refer http://moneybol.com/treatment-of-tangible-assets under-ifrs/ Under Revaluation model; revaluation will be with respect to fair value of item of PPE. It also says that revaluation shall be made with sufficient regularity to ensure that the carrying amount does not materially differ from the fair value as at the balance sheet date where as under Indian GAAP revaluation approach does not specifically state adoption of fair value basis and also about frequency of revaluation of assets.

    • Judgment required in applying Depreciation rates and Method

    When deciding on depreciation rates and method, most common factors that can be taken into account are expected rate of technological developments, expected market requirement and the expected pattern of usage of the assets.

    Review of Residual life

    When reviewing residual values, an entity would estimate the amount that it would currently obtain for the disposal of the asset after deducting the estimated cost of disposal if the asset were already of the age and condition expected at the end of its useful economic life.

    How to do Component Accounting?

    Firstly allocate amount to significant parts and depreciate separately. Then group together significant parts with same useful life and depreciation methods.

    The remainder of the item is to be also depreciated separately. Remainder consists of parts that are individually not significant.

    Regular major inspection performed can also be considered as component of an item of PPE and can be depreciated separately.

    For Instance

    Suppose Cost of Acquisition of Building is Rs. 100,000 allocated to following components:

    Component Amount Depreciation period
    Interior 10000 5 years
    Restoration 12000 10 years
    Elevators 15000 15 years
    Building 63000 30 years

    Above is an illustrative example. An opinion of expert valuers has to be sought for above information by companies for component accounting.

    Replacement of components of PPE

    • Capitalize the cost of replacing major component as separate assets such as replacement of elevators
    • Net book value of old component is removed
    • Routine repair and maintenance expenditure is to be expensed as incurred

    Author name: CA Shalini Tibe