CMA Intermediate · Financial Accounting

Property, Plant and Equipment (AS 10): formula sheet

Full chapter guide

Key formulas

Definition of PPE: PPE = tangible item + held for production/supply of goods or services, rental to others, or administrative purposes + expected use for more than 12 months; Both the purpose limb and the time limb must be satisfied.
Depreciable amount: Depreciable amount = Cost (or amount substituted for cost) − Residual value; This is the amount allocated systematically over the useful life (paragraph 52).
Useful life: Useful life = period of expected availability for use, or number of production or similar units expected; It is based on expected utility to the enterprise, so it may be shorter than economic life (paragraph 59).
Cost of deferred payment purchase: Cost = Cash price equivalent at recognition date; Interest = Total payment − Cash price equivalent; If payment is deferred beyond normal credit terms, the difference is interest over the credit period, unless capitalised under AS 16 (paragraph 25).
Spares and stand-by equipment: Meets PPE definition → PPE; otherwise → Inventory; Paragraph 8.
Land and buildings: Account separately; land normally not depreciated; buildings depreciated; Exceptions such as quarries and landfill sites exist (paragraph 60). An increase in land value does not change the building's depreciable amount.
Cost of purchased PPE: Purchase price + import duties + non-refundable taxes − trade discounts and rebates + directly attributable costs + initial estimate of dismantling and restoration costs; Para 17. Refundable taxes, such as credit-eligible GST, are not part of cost.
Testing costs: Testing cost − net proceeds from sale of items produced during testing; Para 18(e). Only the net amount is capitalised.
Deferred payment: Cost = cash price equivalent at recognition date; total payments − cash price = interest; Para 25. Interest is charged to profit or loss unless capitalised under AS 16.
Exchange of assets: Cost = fair value (of asset given up, unless the asset received is more clearly evident); otherwise carrying amount of asset given up; Para 26 and 28. Use carrying amount if the exchange lacks commercial substance or neither fair value is reliably measurable.
Lump-sum purchase of several assets: Cost of each item = Total price × (Fair value of item ÷ Total fair value of all items); Para 29. If fair values cannot be measured reliably, competent valuers estimate them on a fair basis.
Self-constructed asset: Cost of construction on same principles as purchase − internal profit − abnormal wastage; Para 23. Borrowing cost is included only as per AS 16.
Depreciable amount: Depreciable amount = Cost − Residual value; Residual value is net of estimated disposal costs. Depreciation is charged on this amount.
Straight-line method: Annual depreciation = (Cost − Residual value) ÷ Useful life in years; Constant charge as long as residual value does not change. For part of a year, multiply by months of use ÷ 12.
Diminishing balance method: Depreciation for the year = Opening carrying amount × Rate %; Charge falls each year. Rate is applied on carrying amount, not on original cost.
Units of production method: Depreciation for the period = (Cost − Residual value) × Units produced in the period ÷ Total expected units; Here useful life is measured in units of output or use, not years.
Revised depreciation after a review: New annual depreciation = (Carrying amount at review date − Revised residual value) ÷ Remaining useful life; Applied prospectively as a change in accounting estimate under AS 5. Do not restate earlier years.
Zero depreciation rule: If residual value ≥ carrying amount, depreciation = 0; Depreciation resumes only if residual value later falls below carrying amount.
Revalued asset: Depreciation = (Revalued carrying amount − Residual value) ÷ Remaining useful life; After a revaluation, depreciate the revalued figure over the remaining life. Check residual value and life at the same time.
Component accounting: Total depreciation = Σ depreciation of each significant component + depreciation of the remaining parts; Each component uses its own cost, residual value, life and pattern.
Revaluation gain or loss: Revaluation difference = Fair value − Carrying amount before revaluation; Positive means increase, negative means decrease. Compute it for each asset separately.
Treatment of increase (para 42): Increase → Revaluation Surplus (credit), except up to earlier decrease charged to P&L of the same asset → credit P&L; Reversal of an earlier P&L loss comes first; the balance goes to surplus.
Treatment of decrease (para 43): Decrease → debit Revaluation Surplus up to its credit balance for that asset; excess → debit P&L; Surplus of one asset cannot absorb the loss of another.
Depreciation after revaluation: Annual depreciation = (Revalued carrying amount − Residual value) ÷ Remaining useful life (straight line); Use the revised carrying amount and the remaining life from the revaluation date.
Surplus transfer as asset is used (para 44): Transfer to revenue reserves = Depreciation on revalued amount − Depreciation on original cost; Transfer is made directly, not through the statement of profit and loss. It is permitted (may be transferred), not compulsory.
Policy scope (paras 32, 39): Cost model or revaluation model chosen for the entire class; Revaluing one asset means revaluing the whole class.
Carrying amount at date of disposal: Carrying amount = Cost (or revalued amount) − Accumulated depreciation (up to date of disposal) − Impairment loss; Charge depreciation for the part of the year up to the date of sale before using this.
Gain or loss on disposal: Profit / (Loss) = Net disposal proceeds − Carrying amount; Net disposal proceeds = sale price less costs of disposal such as brokerage or dismantling. A positive result is profit; a negative result is loss.
Asset retired from active use: Shown at the lower of: Net book value and Net realisable value; Any write-down goes to the statement of profit and loss. Show it separately from PPE in use.
Derecognition trigger: Derecognise on: (a) disposal, or (b) no future economic benefits expected from use or disposal; Applies to the whole asset or to a replaced part whose carrying amount is removed.
Carrying amount reconciliation: Closing carrying amount = Opening carrying amount + Additions − Assets retired/disposed − Depreciation ± Revaluation changes − Impairment losses (net of reversals) ± Other changes; Paragraph 81(e) lists the items. Use only those that arise in the question. Show gross block and accumulated depreciation separately as well.
Carrying amount of an asset: Carrying amount = Gross carrying amount − Accumulated depreciation (including accumulated impairment losses); Paragraph 81(d) asks for gross amount and accumulated depreciation at the start and end of the period.
Straight-line depreciation: Annual depreciation = (Cost − Residual value) ÷ Useful life in years; Prorate by months for additions and disposals during the year unless the question says otherwise.
Revaluation increase: Increase = Fair value − Carrying amount; credit to revaluation surplus, except to the extent it reverses an earlier decrease of the same asset charged to profit and loss; Paragraph 42.
Revaluation decrease: Decrease = Carrying amount − Fair value; debit revaluation surplus to the extent of its credit balance for that asset, balance to profit and loss; Paragraph 43.
Surplus transfer on use: Transfer = Depreciation on revalued carrying amount − Depreciation on original cost; Paragraph 44. It goes to revenue reserves, not through profit and loss.
Profit or loss on disposal: Profit or loss = Sale proceeds − Carrying amount at date of sale; Bring depreciation up to the date of sale first.

Quick revision

PPE is tangible, held for production, supply, rental or administration, and expected to be used for more than twelve months.
Initial measurement of an item that qualifies for recognition is at cost.
Cost is cash or cash equivalents paid, or the fair value of other consideration given, at the time of acquisition or construction.
Depreciation is the systematic allocation of the depreciable amount over the useful life.
Useful life can be a period of expected use or the number of production or similar units expected.
Choose either the cost model or the revaluation model and apply it to an entire class of PPE.
Under revaluation, carry the asset at fair value at the revaluation date less later depreciation and impairment, and revalue regularly enough to avoid material difference.
Revaluation needs a fair value that can be measured reliably.
Significant parts with the same useful life and method may be grouped for depreciation.
The cost of replacing a part is recognised in the carrying amount if the recognition criteria are met, and the replaced part is derecognised.
Changes in residual value, useful life or depreciation method are changes in estimate and need disclosure.
Disclose, per class, the measurement basis, depreciation methods, useful lives or rates, gross and accumulated amounts, and a reconciliation of carrying amounts.

Common mistakes

Treating every durable item as PPE regardless of why it is held. Fix: Always ask whether the item is held for use or for sale. Items held for resale are inventory.
Treating all spare parts as inventory, or all as PPE. Fix: Apply the PPE definition to each spare. Qualifying items are PPE, others are inventory.
Capitalising general overheads or inauguration costs Fix: Para 20 excludes inauguration, advertising, training and administration overheads. Link must be direct, not just timing.
Adding refundable GST to cost Fix: Only non-refundable purchase taxes form cost. Credit-eligible taxes are left out.
Charging depreciation on full cost without deducting residual value in the straight-line method. Fix: Always write the depreciable amount line first: cost less residual value. Then divide by useful life.
Restating earlier years when useful life, residual value or method is changed. Fix: AS 10 treats these as changes in accounting estimate under AS 5. Recalculate only from the review date, using the carrying amount and remaining life.
Crediting every revaluation increase to the statement of profit and loss. Fix: Credit it to Revaluation Surplus. Only the part that reverses an earlier P&L decrease of the same asset goes to P&L.
Debiting a revaluation decrease fully to P&L even when a surplus exists. Fix: Check the surplus balance of that asset and debit it first; only the excess hits P&L.
Ignoring depreciation from the start of the year to the date of sale. Fix: Always compute depreciation up to the exact disposal date first, then find the carrying amount.
Comparing sale price with original cost instead of carrying amount. Fix: Write 'carrying amount' as a line in your working and use only that for the comparison.

Exam tips

Write both limbs of the PPE definition in any theory answer, then apply them to the facts given.
In MCQs, look for the purpose trap: the same item can be PPE for a user and inventory for a dealer.
Quote paragraph 8 for spares and paragraph 9 for unit of measure and materiality when the question allows.
In numerical questions, split land and building first, and separate interest from cost on deferred payment.
Keep definitions word-accurate. Depreciable amount is cost less residual value, and useful life can be in time or units.
In written answers, show a working note listing each item as included or excluded with the reason. Step marks come from this.
Read each MCQ for the one word that decides it: trade discount, refundable, abnormal, net of proceeds.
For exchange questions, check commercial substance and reliability of fair value before choosing the basis.