Accounting Standard 10 - Property, Plant and Equipment PDF

# Accounting Standard - 10 - Property, Plant and Equipment ### Meaning of Property, Plant and Equipment - PPE is a tangible fixed asset. - Expected to be used for more than 12 months. - Held for use in - Producing goods (plant & machinery) - Providing service (delivery van) - Rental to...

# Accounting Standard - 10 - Property, Plant and Equipment ### Meaning of Property, Plant and Equipment - PPE is a tangible fixed asset. - Expected to be used for more than 12 months. - Held for use in - Producing goods (plant & machinery) - Providing service (delivery van) - Rental to others (house) - For administration purpose (computer & furniture) ### Objective - Prescribed accounting treatment of PPE so that users of financial statements know about the investment of the company in PPE. - Change in such investment. - This includes: - Recognition of assets - Determination of carrying amount - Impairment losses - Depreciation charged ### Biological Asset - **Living animals:** AS-10 is not applicable. - **Plant:** - **Bearer plant:** AS-10 is applicable. - **Non-bearer plant:** AS-10 is not applicable. #### Bearer Plant - Used in the production or supply of agricultural output (e.g. mango tree), - Used to produce for more than 12 months. - There is a remote likelihood of being sold as agriculture produce **except for incidental scrap value**. #### Non-Bearer Plant - Plant which are cultivated to be harvested as agricultural produce (e.g. coriander plant) - Plant which are cultivated to be sold and production is also sold (e.g. rose flower and plant) - Annual crop (e.g. wheat) ### Agriculture Activity - Agriculture activity is managed by an enterprise. - It's used for biological transformation (e.g. cows raised) or harvesting for biological asset for sale. - Conversion into agriculture produce or into additional biological asset. ### Carrying Amount - Gross carrying amount \(cost\) = XXXX - Less: Accumulated depreciation = (XXX) - Less: Accumulated impairment loss = (XXX) - **Carrying amount = XXX** ### Impairment Loss - Occurs when the carrying amount exceeds the recoverable amount. #### Recoverable Amount - **Value in use** - **Net selling price** (higher of the two). ### Depreciation - **Example:** - **Machine:** 10 lakh - **Economic life:** 10 year - **Depreciation charge:** 10% on SLM - **Cost of machine:** = 10 lakh - **Less: Depreciation of first year:** = (1 lakh) - Book value/WDV = 9 lakh - **Less: Depreciation of second year:** = (1 lakh) - Book value / WPV = 8 lakh - **Less: Depreciation of third year:** = (1 lakh) - WDV after third year = 7 lakh - **Book value/WDV of machine after 4th year:** = (Cost of machine - 4 year depreciation (accumulated depreciation)) - = 10L - 4L - = 6 lakh - **If the accumulated impairment loss is NIL, then what will be the carrying amount?** - **Cost of machine:** = gross carrying amount = 10 lakh - **Less: Accumulated depreciation:** = (4lakh ) - **Less : Accumulated impairment loss:** = (NIL) - **Carrying amount = 6 lakh** ### Revaluation Model - **Example:** - **Machine:** 10 lakh (2020) - **Depreciation:** @ 10% (WDV) - **At what value of the machine should be recorded in 2025 under the revaluation model? The machine was revalued in the third year.** - **Machine cost = 10 lakh** - **Less: Depreciation @ 10%:** = (1 lakh) - Book value= 9 lakh - **Less: Depreciation @ 10%:** = (90k) - Book value = 8,10,000 - **Revalued:** - **If you were to sell the machine today, you would get 9 lakhs for it.** - **Book value of the machine at the 3rd year needs to be adjusted to 9 lakhs in the company's books.** - **Book value at the 3rd year:** = 9 lakh - **Less: Depreciation @ 10%:** = (90k) - Book value = 8,10,000 - **Less: Depreciation @ 10%:** = 81,000 - Book value = 7,29,000 - **To calculate the carrying amount:** - **Gross carrying amount = 10 lakh** - **Less: Accumulated depreciation (last 5 years): **= (361,000) - (1,90,000 + 1,71,000) - **Less: Accumulated impairment loss:** = NIL - **Carrying amount = 6,39,000** ### Carrying Amount Calculated from Two Models - Carrying amount can be calculated from two models: - **Cost model** (previously discussed) - **Revaluation model** ### Recoverable Amount - **Example:** - **Book value of asset in use:** = 8,50,000 - **Net selling price:** = 8,00.000 (higher) - **Recoverable amount = 8,50,000** ### Impairment Loss - **Example:** - **Carrying amount:** = 6,39,000 - **Recoverable amount:** = 6,00,000 - **Impairment loss = 39,000** ### Enterprise - Specific Value - **Example:** - **Machine:** = 10 lakh - **Useful life:** = 5 years - **Production of unit:** - **Sale of unit**: - **Cash inflow** - **Cash inflow from the use of the machine until disposal is shown in the diagram, as well as the aggregate information.** ### Compound Interest - **Formula:** - *A = P (1 + r/100)^n* - *A/ (1 + r/100)^n = P* - *A = amount | future value* - *P = principle | present value* - *n= number of years* - *r = rate of interest* - **Calculation:** - *100,000/(1 + 10/100)^1 = 100,000/(1 + 0.1)^1 = 100,000*(1.1)^-1 = 100,000/1.1 = 90,909* - **Present value = 90,909* - **Interest loss = 100,000 - 90,909* # Accounting Standard - 11 - Foreign Currency ### Effect of Changes in Foreign Exchange Rate - This accounting standard deals with reporting foreign exchange transactions in financial statements. ### Foreign Currency - **Any currency other than Rupees** (e.g. dollar, yen, euro, Russian ruble) ### *As per AS-11, Rupees will be the reporting currency.* ### Objective - An enterprise may carry on activities involving foreign exchange in two ways: - **Transactions in foreign currency:** - **Example:** Mr. A (India) sells goods to John (USA) and receives payment in USD. - **Foreign operations:** - **Example:** Mr. A (India) opens a branch in Russia. ### Scope - Deals with - **Accounting for transactions in foreign currency**: - This is a major source of exam questions. - **Translating financial statements of foreign operations to reporting currency**: - **Example:** If a Foreign Branch needs to report their financials to their Head Office (India), they would use AS-11 to calculate the foreign currency amounts based on Indian Rupees. - **Accounting for foreign currency transactions in the nature of forward exchange contracts** ### The Standard Does Not Cover the Following Issues - It does not specify the currency which an enterprise should present in financial statements. - Re-statement of an enterprise's financial statements from its reporting currency to another currency. - Cash flow of foreign operations (Refer to AS-3 Cash Flow statement). - Foreign currency borrowing (Refer to AS-16 Borrowing Cost). ### Important Definitions - **Closing rate:** The exchange rate on the date that your financial year closes (typically 31 March). - **Average rate:** The average of all the exchange rates that were applied during the year. - **Exchange rate:** The ratio of the value of two currencies. ### Monetary Items - Monetary items are money held or other items whose settlement or realised amount is determined by a sum of money (e.g. cash, debtors, bank, trade receivables). # Guidelines as per AS-11 Revised - **As per AS-11 Revised, all foreign currency transactions should be initially recorded by applying the foreign exchange rate (FER) prevailing on the date of the transaction**. - **Example:** - Goods sold to a foreign client on 1 April 2023 for $10,000. The exchange rate on 1 April 2023 was \(\$1 = ₹75\) and the firm's financial year ends on 31 March. The client settled the amount on 1 May 2024, at an exchange rate of \(\$1 = ₹85\). ### Journal Entry - **On 1 January 2024:** - **Foreign Debtor A/c - Dr** (10,000 x 75) = 7,50,000 (monetary item) - **To Sales A/c** = 7,50,000 (non-monetary item) - *Being goods sold to a foreign debtor.* ### AS-11 Revised on the Reporting Date - **On 31 March 2024**, you would record the transaction based on the exchange rate as of that date, which is **\(\$1= ₹80\)**. - **Foreign Debtor A/c - Dr** = (10,000 x 80) = 8,00,000 (monetary item) - **To Statement of P&L A/c** = (10,000 x (80 - 75)) = 50,000 - **Note:** - During the year, you record the amounts for monetary items at their initial exchange rates. - When the financial year ends (31 March), you adjust them to the closing rate, which in this case is \(\$1= ₹80\). - You recognize any profit or loss on those transactions in your profit and loss statement. ### As per AS-11 Revised on the Date of Settlement - It is on the date of settlement (in this example, 1 May 2024) that any loss or gain should be recognized in your profit and loss statement. - **Example:** - Date of settlement: 1 May 2024 at \(\$ 1 = ₹85\) - The balance sheet for the foreign debt is ₹8,00,000. - **Bank A/c - Dr**: (10,000 x 85) = 8,50,000 - **To Foreign Debtor:** = 8,00,000 (10,000 x 80) - **To Statement of P&L:** = 50,000 (10,000 x 5) - *Being in the case of a profit due to the exchange rate.* - **Example:** - Date of settlement: 1 May 2024 at \(\$ 1 = ₹75\) - The balance sheet for the foreign debt is ₹8,00,000. - **Bank A/c - Dr**: (10,000 x 75) = 7,50,000 - **To Statement of P&L A/c - Dr:** = 50,000 - **To Foreign Debtor:** = 8,00,000 - *Being in the case of a loss due to the exchange rate.* ### Full Fledge Example for AS-11 - **Scenario:** - On 1 April 2023, you purchase goods on credit from a foreign supplier at a cost of $10,000, using an exchange rate of \(\$1 = ₹75\). - Your financial year closes on 31 March, with the closing rate at that time being \(\$1= ₹80\). - The supplier settles the debt on 1 May 2024 at an exchange rate of \(\$1= ₹85\). - **Initial recording on 1 January 2024:** - **Purchase A/c - Dr:** (10,000 x 75) = 7,50,000 (monetary item) - **To Foreign Creditor:** = 7,50,000 (non-monetary item) - *Being the goods purchased on credit.* - **On the reporting date (31 March 2024):** - **Statement of P&L A/c - Dr:** = (10,000 x (80 - 75)) = 50,000 - **To Foreign Creditor:** = 50,000 - **On the date of settlement (1 May 2024):** - **Statement of P&L A/c - Dr:** = 50,000 - **Foreign Creditor A/c - Dr:** = 800,000 - **To Bank A/c:** = 8,50,000 ### Acquisition of Fixed Assets - **As per AS-11 Revised, if any fixed asset has been acquired in foreign currency, then on the reporting date, fixed assets should be recorded at a historical cost. Any liabilities related to fixed assets should be recognised at the closing exchange rate. Any loss or gain must be recognised in the statement of profit and loss.** - **Example:** - On 1 April 2023, you purchase a fixed asset on credit from a foreign supplier at a cost of $15,000 with an exchange rate of \(\$1 = ₹75\). Your financial year closes on 31 March, with the closing rate at that time being \(\$1 = ₹80\). The supplier settles the debt on 1 May 2024 at an exchange rate of \(\$1 = ₹85\). - **Initial recording on 1 January 2024:** - **Fixed Asset A/c - Dr;** (15,000 x 75) = 11,25,000 (non-monetary item) - **To Foreign Creditor: ** = 11,25,000 (monetary item) - **On the reporting date (31 March 2024):** - **Statement of P&L A/c - Dr:** = (15,000 x (80 - 75)) = 75,000 - **To Foreign Creditor:** = 75,000 - **On the date of settlement (1 May 2024):** - **Statement of P&L A/c - Dr:** = 75,000 - **Foreign Creditor A/c - Dr:** = 12,00,000 - **To Bank A/c:** = 12,75,000 ### *Para-46A - Acquisition of Fixed Assets in Foreign Currency through a Loan* - This para was added by the Ministry of Corporate Affairs. - **If an entity acquires a depreciable fixed asset by way of a foreign currency loan, the entity can choose to recognize any loss or profit on the reporting date due to the change in the foreign exchange rate (FER), either by debiting or crediting the fixed asset a/c.** - **Example:** - On 1 April 2023, you acquired a fixed asset on credit from a foreign supplier at a cost of $15,000 using an exchange rate of \(\$1 = ₹75\). You took out a foreign currency loan to finance the purchase. Your financial year closes on 31 March, with the closing rate at that time being \(\$1 = ₹80\). - **If Para-46A is not opted:** - **Initial recording:** - **Plant & Machinery A/c - Dr:** (15,000 x 75) = 11,25,000 - **To Foreign Creditor:** = 11,25,000 - **On the reporting date:** - **Statement of P&L A/c - Dr:** = 75,000 - **To Foreign Creditor:** = 75,000 - **If Para-46A is opted:** - **Initial recording:** - **Plant & Machinery A/c - Dr:** -(15,000 x 75) = 11,25,000 - **To Foreign Creditor:** = 11,25,000 - **On the reporting date:** - **Plant & Machinery A/c - Dr:** = 75,000 - **To Foreign Creditor:** = 75,000 # Topic 2 - Translation of Financial Statements of Foreign Operations - This topic is already covered within the Foreign Branch chapter in the accounting syllabus. # Topic 3 - Forward Exchange Contracts - **As per AS-II Revised, any loss on a forward contract shall be amortised over the life of the forward contract.** - **Example:** - You take out a loan in foreign currency (\$100,000) on 1 April 2023 with an exchange rate of \(\$1 =₹75\). - You enter a 5 year forward contract to repay the loan at a rate of \(\$1= ₹80\). - The repayment is made on 1 May 2024. ### Calculation of Amortised Loss - **Loan amount = 100,000 x 75 = 75 lakhs** - **Repayment amount= 100,000 x 78 = 78 lakhs** - **Loss due to forward contract = 78 lakhs - 75 lakhs = 3 lakhs** - **Amortised over the life of the forward contract:** - **2023-24: Loss amortised:** = (300,000 x 3) / 5 = 1,80,000 - **2024-25: Loss amortised:** = (300,000 x 2) / 5 = 1,20,000 ### *Illustration-7* - **Scenario:** - On 7 December 2021, you performed technical services for Lucas Ltd. for a cost of $24,000 at a rate of \(\$1 = ₹68.80\). - The settlement date was on 20 May 2022. - The exchange rate on 31 March 2022 was \(\$1 = ₹70.45\) and on 20 May 2022 was \(\$1 = ₹71.50\). - **Journal entries:** - **7/12/21:** - **Technical Service A/c - Dr:** (24,000 * 68.80) = 16,51,200 - **To Lucas Ltd:** = 16,51,200 - **31/12/22:** - **Statement of P&L A/c - Dr:** = 24,000 * ( 70.45 - 68.80) = 39,600 - **To Lucas Ltd:** = 39,600 - **20/5/2022:** - **Lucas Ltd A/c - Dr** = 16,90,800 - **Statement of P&L A/c - Dr:** = 25, 200 - **To Bank A/c:** = ( 24,000 x 71.50) = 17,16,000 - **Loss for 2021-22 = 39,600** - **Loss for 2022-23 = 25,200** ### Alternate Solution - **Initial recording:** - **Lucas Ltd:** = 24,000 x 68.80 = 16,51,200 - **Reporting date (31 December 2022):** - **Lucas Ltd. (creditor):** = 24,000 x 70.45 = 16,90,800 - **Loss transferred to Statement of P&L for 2021-22:** = 16,90,800 - 16,51,600 = 39,200 - **On the settlement date (20 May 2022):** - **Lucas Ltd:** = 24,000 x 71.50 = 17,16,000 - **Lucas Ltd (B/S):** = (balance) 16,90,800 - **Loss for 2022-23 = 25,200** ### *Illustration-8* - **Scenario:** - On 1 April 2021, you purchased a machine for ₹2,16,00,000 at an exchange rate of \(\$1 = ₹67.50\) - **Solve:** - **Cost of machine in USD:** = 216 lakhs / 67.50 = 320,000 - **Loss for this year (2021-22) = 320,000 x (70.45 - 67.50) = ₹944,000** # Accounting Standard - 12 - Accounting for Government Grants ### Introduction - **Governments around the world provide different forms of incentives and grants to organizations which undertake activities that are important to the country.** - **Government grants received by the company from the government are of various forms, such as:** - Incentive - Subsidy - Duty drawback ### Accounting Standard - 12 - The accounting standard - 12 deals with accounting for government grants. ### Excluded Items - This standard does not deal with: - **Special accounting problems arising from government grants in financial statements, such as reflecting the effect of changing prices.** - **Government assistance other than in the form of government grants (e.g., loans with low interest rates).** - **Government participation in the ownership of an enterprise.** ### Meaning of Government - **Central government:** - **State government:** - **Government agencies:** - **Local authority:** - **National & International government** ### Meaning of Government Grants - **Government grants are payments made by the government (in cash or in kind) to an enterprise for past or for future compliance with certain conditions**. ### Recognition - **Government grants should not be recognized until there is reasonable assurance that:** - **The enterprise will comply with the conditions attached to them.** - **The grant will be received**. - **Note:** - The mere receipt of the grant is not conclusive evidence that the conditions attached have been or will be fulfilled. ### Method of Accounting for Government Grants - **There are two approaches for accounting treatment of government grants:** - **Capital:** - The grant is capitalized by crediting it to the capital reserve when the nature of the grant is for the development of the promoter's interest. - **Income:** - The grant amount is treated as revenue income. ### Capital Approach - **Scenario:** - A government (Ruchi) provides a grant of ₹50 crores to ABC Ltd. to help them start a business in their Special Economic Zone (SEZ), which has an initial investment of ₹100 crores. - **Accounting:** - **Government Grant A/c - Dr** = 50 crores - **To Capital Reserve:** = 50 crores - **Fixed Asset A/c - Dr**= 100 crores - **To Bank:** = 100 crores - **Bank A/c - Dr** = 50 crores - **To Government Grant:** = 50 crores ### Acquisition of a Non-Depreciable Asset - **If the grant is received for the acquisition of a non-depreciable asset, then the grant amount should be credited to the capital reserve account.** - **Example:** - ABC Ltd. acquires land in a Special Economic Zone (SEZ) for ₹50 crores. - The government also provides a grant of ₹20 crores. - **Accounting:** - **Land A/c - Dr** = 50 crores - **To Bank:** = 50 crores - **Bank A/c - Dr** = 20 crores - **To Government Grant:** = 20 crores - **Government Grant A/c - Dr** = 20 crores - **To Capital Reserve:** = 20 crores - **For Refund of Government Grant:** - **Capital Reserve A/c - Dr**: 20 crores - **To Bank:** 20 crores ### Acquisition of a Depreciable Asset - **If the grant is received for the acquisition of a depreciable asset, there are different alternatives for accounting treatment:** #### Alternative 1 - **The grant amount should be capitalized by reducing the cost of the fixed asset.** - **Example:** - ABC Ltd purchases a machine for 10 crores. - The machine's useful life is 5 years. - The government provides a grant of 5 crores. - **Accounting:** - **Plant & Machinery A/c - Dr:** 10 crores - **To Bank:** 10 crores - **Bank A/c - Dr:** 5 crores - **To Government Grant:** 5 crores - **Government Grant A/c - Dr:** 5 crores - **To Plant & Machinery A/c:** 5 crores - **Depreciation:** - **Depreciation per year:** = (10 crores - 5 crores) / 5 = 1 crore - **Depreciation A/c - Dr:** 1 crore - **To Plant & Machinery:** 1 crore - **P&L A/c - Dr:** 1 crore - **To Depreciation:** 1 crore - **For refund of the grant after the 2nd year:** - **Plant & Machinery A/c - Dr:** 5 crores - **To bank:** 5 crores - **Cost of the machine:** 10 crores - **Less: Depreciation:** 2 crores - **The book value of the machine after 2 years:** 8 crores - **Depreciation per year for the next 3 years:** = (8 crores) / 3 = 2.66 crores - **The government grant is recognized as revenue income. ** #### Alternative 2 - Deferred Government Grant Approach - **The grant amount is treated as deferred income, and the grant as such is credited to the deferred government grant account. The deferred government grant should be transferred to the profit & loss account over the useful life of the asset based on the depreciation method used. ** - **Example:** - ABC Ltd. purchases a machine for 10 crores. - The machine's useful life is 5 years. - The government provides a grant of 5 crores. - ** Accounting:** - **Plant & Machinery A/c - Dr:** 10 crores - **To Bank:** 10 crores - **Bank A/c - Dr:** 5 crores - **To Government Grant:** 5 crores - **Government Grant A/c. - Dr:** 5 crores - **To Deferred Government Grant:** 5 crores - **Transfer to P&L:** - **Transfer to P&L:** = 5 crores / 5 = 1 crore (per year) - **End of the first year, transfer to P&L:** - **Deferred Government Grant A/c - Dr:** 1 crore - **To P&L A/c:** 1 crore - **End of the second year, transfer to P&L:** - **Deferred Government Grant A/c - Dr:** 1 crore - **To P&L A/c:** 1 crore - **For refund of the grant after the 2nd year:** - **Deferred government grant = 5 crores ** - **Less : Amortized amount (1 crore):** = (2 crores) - **Unamortized amount = 3 crores ** - **Deferred Government Grant A/c - Dr:** 3 crores - **Statement of P&L A/c.:** - Dr 2 crores - **To bank:** 5 crores ### Grants Received in Kind - Non-Monetary Terms - **If a grant is received in kind, then the asset should be recorded at either a concessional rate or a free of cost amount:** - **Concessional rate:** - **Example:** - ABC Ltd. acquires land for ₹100 lakhs at a concessional rate of ₹10 lakhs. - **Accounting:** - **Land A/c - Dr:** 10 lakhs - ** To Bank:** 10 lakhs - **Free of cost:** - **Example:** - ABC Ltd. acquires land for ₹100 lakhs at a free of cost amount. - **Accounting:** - **Land A/c - Dr:** 1 lakh (nominal value) - **To Bank:** 1 lakh (nominal value) # Income Approach - **If a grant is received against an expense, then the amount of the grant should be treated as revenue income.** - **There are three methods of accounting for government grants under the income approach:** - **Method-1: SPL Other income - Government Grants:** = XXX - **Method-2: SPL Expense - Other expenses - Government grant related expense:** = XXX - **Method-3: Set-Off - Other income - Government Grant:** = XXX - **Less: Expense:** = (XXX) ### Example of How Government Grants Would Be Recorded in a Profit & Loss Statement - **The following table summarizes the method of recording government grants in the profit and loss statement**: | Particulars | Note No. |As at the end of the Current Reporting Period | As at the end of the previous Reporting Period | |---|---|---|---| | I. Revenue from Operations | | XXXX | XXXX | | II. Other Income | | XXXX (Government Grant) | XXXX | | III. Total Revenue (I + II) | | XXXX | XXXX | | IV. Expenses: | | | | | Cost of Materials Consumed | | XXXX | XXXX | | Purchase of Stock in Trade | | XXXX | XXXX | | Changes in Inventories of Finished Goods, Work in Progress, and Stock in Trade | | XXXX | XXXX | | Employee Benefit Expense | | XXXX | XXXX | | Finance Cost | | XXXX | XXXX | | Depreciation and Amortization Expense | | XXXX | XXXX | | Other Expenses | | XXXX (Government Grant Related Expense) | XXXX | | Total Expenses | | XXXX | XXXX | | V. Profit before Tax (III - IV) | | (XXXX) | (XXXX) | | VI. Tax | | (XXXX) | (XXXX) | | VIL. Profit after Tax (V - VI) | | XXXX | XXXX | ### *Illustration-10* - **Scenario:** - On 1 April 2020, you purchased a machine for ₹44,85,000. - You received a government grant of ₹7,35,000. - The machine's useful life is 4 years. - The residual value is ₹15,36,000. - The grant is repayable in the year 2022-23. - **Solve:** - **Net Cost of Machine:** = 44,85,000 - 7,35,000 = 37,50,000 - **Depreciation per year:** = (37,50,000 - 15,36,000) / 4 = ₹5,53,500 - **Journal entries:** - **Year 2020-21:** - **Depreciation:** = (5,53,500 x 2) = 11,07,000 - **Year 2021-22:** - **Repay the grant:** = 7,35,000 - **Depreciation:** = 5,53,500 - **Total amount to be depreciated:** = 11,07,000 + 5,53,500 = 16,60,500 - **Year 2022-23:** - **Depreciation expense:** = (37,50,000 - 16,60,500 - 15,36,000) = 5,53,500 - **Grant payable:** ₹7,35,000. - **Total amount to be depreciated:** = 5,53,500 + 7,35,000 = 12,88,500 - **Year 2023-24:** - **Depreciation:** = (12,88,500) / 4 = 3,22,125 - **Year 2024-25:** - **Depreciation expense:** = 3,22,125 # Accounting Standard - 16 - Borrowing Cost ### Introduction - **This standard deals with the accounting treatment for borrowing costs**. - **Example:** - On 1 April 2020, ABC Ltd. takes out a loan of ₹80 lakhs at an interest rate of 10% per annum to finance