Financial Accounting · Property, Plant and Equipment (AS 10)

AS 10 Scope, Definitions and Recognition of PPE

Updated 10 October 2026 · Fact-checked

Under AS 10, property, plant and equipment are tangible items held for production or supply of goods or services, for rental to others, or for administrative purposes, and expected to be used for more than twelve months. To solve questions, test each item against both limbs, then check cost and materiality.

Understand AS 10 Scope, Definitions and Recognition of PPE

AS 10 tells you how to account for tangible assets that a business uses over several years, such as machinery, buildings, furniture and vehicles. The main issues it covers are which items count as assets, how to measure their cost, how to charge depreciation and how to treat disposal.

This topic is the starting point. You must know what property, plant and equipment (PPE) means. The standard defines PPE as tangible items that (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than a period of twelve months. Both limbs must be met.

The purpose test separates PPE from stock. A machine a factory uses is PPE. The same machine held by a dealer for resale is inventory, because it is not held for use. The time test removes short-lived items. A tool expected to last only six months fails limb (b).

Spare parts, stand-by equipment and servicing equipment need care. Paragraph 8 says they are recognised under AS 10 when they meet the definition of PPE. Otherwise they are classified as inventory. So a major stand-by engine used for more than twelve months is PPE, while routine consumable spares are inventory.

The standard does not fix the unit of measure (paragraph 9). You use judgement. A whole construction project may be treated as one unit, and small items such as moulds, tools and dies may be aggregated. An enterprise may also expense an item because the amount is not material.

A few other definitions appear here. Depreciable amount is cost, or other amount substituted for cost, less residual value. Useful life is the period an asset is expected to be available for use, or the number of production or similar units expected from it. Land and buildings are separable assets and are accounted for separately even if bought together.

Key rules to remember

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.

How to solve AS 10 Scope, Definitions and Recognition of PPE questions

Use this sequence for any question asking whether an item is PPE or how it should be treated.

1Identify the item and check it is tangible. Intangibles are outside this test.
2Find why the business holds it. Production or supply of goods or services, rental to others, or administrative use passes the purpose limb. Holding for resale does not.
3Check expected use. It must be more than twelve months.
4For spares, stand-by or servicing equipment, apply the PPE definition. If it qualifies, treat as PPE. Otherwise treat as inventory.
5Decide the unit of measure and materiality. Aggregate small items or expense immaterial ones if the facts say so.
6If land and buildings are bought together, split the price and treat them as separate assets.
7If payment is deferred, take cost as the cash price equivalent and show the rest as interest.
8State the conclusion with the reason in one line, quoting the limb that decides it.

Quickest way: Two-limb test in 30 seconds

When to use it: Use for MCQs and short 'is it PPE or inventory' questions.

Ask: is it used or held for sale? Held for sale means inventory.
Ask: will it last more than twelve months? If not, it is not PPE.
If both answers pass, it is PPE. Spares follow the same test.
Check for a land and building split or deferred payment trap before choosing the option.

Common mistakes in AS 10 Scope, Definitions and Recognition of PPE

Treating every durable item as PPE regardless of why it is held.
Students focus on the physical nature and forget the purpose limb.
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.
Students memorise one side of paragraph 8.
Fix: Apply the PPE definition to each spare. Qualifying items are PPE, others are inventory.
Depreciating land along with the building.
The combined purchase price is treated as a single asset.
Fix: Separate land and building. Land generally has an unlimited life and is not depreciated, with exceptions such as quarries and landfill sites.
Capitalising the full deferred payment price.
Students use the total instalments paid as cost.
Fix: Cost is the cash price equivalent. The excess is interest over the credit period unless capitalised under AS 16.
Confusing useful life with economic life.
Both terms sound alike.
Fix: Useful life is the expected utility to the enterprise and may be shorter than economic life because of the enterprise's disposal policy.
Thinking AS 10 forces every small item to be capitalised.
Students ignore paragraph 9 on judgement and materiality.
Fix: An immaterial item may be expensed, and insignificant items may be aggregated.

Worked examples

Example 1

Sharma Motors Ltd deals in cars and holds 10 cars for sale. It also uses 2 cars for its sales executives for several years. How should each be classified under AS 10?

Show the solution

Cars held for sale are not held for use in production, rental or administration. They fail the purpose limb.
So the 10 cars are inventory.
The 2 cars used by executives are tangible and held for administrative purposes.
They are expected to be used for more than twelve months, so both limbs are met.
Hence they are PPE.

Answer: The 10 cars are inventory. The 2 executive cars are PPE.

Example 2

Kaveri Textiles Ltd buys a machine with a cash price equivalent of ₹8,00,000. It pays ₹9,00,000 in total under deferred terms beyond normal credit terms. It also holds a stand-by generator expected to be used for 5 years and consumable spares expected to be used within 6 months. State the cost of the machine, the interest, and the classification of the generator and spares.

Show the solution

Cost of the machine is the cash price equivalent at the recognition date: ₹8,00,000.
Interest = ₹9,00,000 − ₹8,00,000 = ₹1,00,000.
This interest is recognised over the credit period, unless capitalised under AS 16.
The generator is a tangible stand-by item used for more than twelve months, so it meets the PPE definition.
The consumable spares will be used within twelve months, so they fail the time limb and are inventory.

Answer: Machine cost ₹8,00,000; interest ₹1,00,000 over the credit period (unless capitalised under AS 16); generator is PPE; consumable spares are inventory.

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.

Practice questions from Property, Plant and Equipment (AS 10)

AS 10 Scope, Definitions and Recognition of PPE in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

AS 10 Scope, Definitions and Recognition of PPE: frequently asked questions

What is the definition of PPE under AS 10?

PPE are tangible items held for use in production or supply of goods or services, for rental to others, or for administrative purposes. They must also be expected to be used during more than twelve months. Both conditions must be met.

What is the difference between PPE and inventory under AS 10?

PPE is held for use in the business and lasts more than twelve months. Inventory is held for sale or is a consumable item that does not meet the PPE definition. The same type of item can fall in either group depending on why it is held.

Are spare parts PPE or inventory?

Spare parts, stand-by equipment and servicing equipment are PPE if they meet the PPE definition. Otherwise they are classified as inventory.

Is land depreciated under AS 10?

Land and buildings are accounted for separately. Land generally has an unlimited useful life and is not depreciated, with exceptions such as quarries and landfill sites. Buildings are depreciated.