Beginners Guide to Accounting Standard (AS) 10 – Property, Plant and Equipment

Table of Content

1. What are Property, Plant and Equipment (PPE)?

2. Scope

3. Recognition of assets

4. Initial measurement

5. Subsequent costs

6. Measurement subsequent to initial recognition

7. Revaluations

8. Increase/decrease due to revaluation

9. Depreciation

1. What are Property, Plant and Equipment (PPE)?

The Property, Plant and Equipment (PPE) also generally known as fixed assets; these fixed assets are tangible property in contrast to the intangible property which is dealt by another AS-26. These tangible assets are:

• • Held for use in production or supply of goods and services, for rental to others, or for administrative purposes.
  • Expected to be used during more than one period.
  • Not held for sale in the normal course of business.

The examples of Property, Plant and Equipment (PPE) are land, building, plant and machinery, furniture and fitting and office equipment etc.

1.1 Objective

The principal issues in accounting for PPE are:

• • The recognition of the assets,
  • Determination of their carrying amounts and
  • The depreciation charges and impairment losses to be recognised in relation to them.

2. Scope

• • This Standard prescribes the accounting for PPE except when another AS permits different accounting treatments.
  • This Standard does not apply to:

(a) Biological assets related to agricultural activity other than bearer plants. This Standard applies to bearer plants but it does not apply to the produce on bearer plants (bearer plants is explained in next Para);

(b) Wasting assets including mineral rights, expenditure on the exploration for and extraction of minerals, oil, natural gas and similar non-regenerative resources.

However, this Standard applies to items of property, plant and equipment used to develop or maintain the assets described in (a) and (b) above.

• • Investment property is an investment in land or buildings that are not intended to be occupied substantially for use in the operations of, the investing enterprise. The investment property is not PPE and it should be accounted for only in accordance with the cost model prescribed in this Standard.

2.1 What is biological asset, Agriculture activity, Agriculture produce and bearer plant?

The standard defines these terms as under:

• • Biological Asset is a living animal or plant and is core income producing asset of agricultural activity, therefore not covered by PPE.
  • Agricultural Activity is the management by an enterprise of the biological transformation and harvest of biological assets for sale or for conversion into agricultural produce or into additional biological assets.
  • Agricultural Produce is the harvested product of biological assets of the enterprise.
  • Bearer plant is a plant that:

(a) is used in the production or supply of agricultural produce;

(b) is expected to bear produce for more than a period of twelve months; and

(c) has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.

The following are not bearer plants:

(i) Plants cultivated to be harvested as agricultural produce (for example, trees grown for use as lumber);

(ii) plants cultivated to produce agricultural produce when there is more than a remote likelihood that the entity will also harvest and sell the plant as agricultural produce, other than as incidental scrap sales (for example, trees that are cultivated both for their fruit and their lumber); and

(iii) Annual crops (for example, maize and wheat). When bearer plants are no longer used to bear produce they might be cut down and sold as scrap, for example, for use as firewood. Such incidental scrap sales would not prevent the plant from satisfying the definition of a bearer plant.

Example 1: Mango tree is a bearer plant and it covered by AS-10 PPE, however mango grown in tree is a produce of bearer plant and is not covered by this Standard. Further in wheat crop the plant of the wheat is not a bearer plant because it is cut down and sold as scrap.

3. Recognition of assets

3.1 Criteria for Recognition

The cost of an item of PPE should be recognized as an asset if and only if:

• • It is probable that future economic benefits associated with the asset will flow to the entity and
  • The cost of the item can be measured reliably.

The degree of certainty attached to the flow of future economic benefits must be assessed. This should be based on the evidence available at the date of initial recognition (usually the date of purchase). The entity should thus be assured that it will receive the rewards attached to the asset and it will incur the associated risks, which will only generally be the case when the rewards and risks have actually passed to the entity. Until then, the asset should not be recognized.

Example 2: A plant and machinery is purchased for ` 20 lakhs. It satisfied the recognition criteria: future economic benefits will flow to the entity in the form of the capability to produce goods using the machinery, sell them and earn profits. Similarly, its price can be measured reliably from the purchase invoice. Therefore, it qualifies to be recognized as property, plant and equipment (PPE).

Spare parts are usually treated as inventory and recognized in the profit or loss as and when consumed.

Example 3: Small spare parts for machinery are purchased at a cost of ` 1.25 lakhs and stored by the entity. These are regularly issued whenever required by the maintenance department. The balance of the spares on hand at the Balance Sheet date was worth ` 70,000. The consumed part of ` 55,000 should be shown as an expense in the Statement of Profit and loss. The balance of ` 70,000 should be carried forward as inventory it accounting should be as per AS-2.

Major spare parts and standby equipment are treated as property, plant and equipment when they are expected to be used over more than one period. They are included in non-current assets from the date the cost is incurred.

Example 4: Induga Ltd. purchased an item of machinery for ` 2 lakhs, together with major spares parts worth ` 25,000 not readily available in the market. It should recognise the total of ` 2.25 lakhs and PPE

Those which can be used exclusively with an item of PPE are accounted for as PPE.

Example 5: Z Ltd. purchases a ‘made to order’ machine for ` 5 lakhs and alongside also purchased spare parts worth ` 60,000 which can be used only on this machinery and not any machinery elsewhere. Advice Z Ltd. on the accounting treatment of spare parts.

Along with the cost of machinery, the cost of spares also, should be capitalised i.e., recognized in the carrying value, thus, the total carrying value is ` 5.60 lakhs.

Any expenditure incurred that meets these recognition criteria must be accounted for as an asset (PPE). The Standard makes reference to individually insignificant items that can be aggregated.

However, very often, in practice, entities adopt an accounting policy to expense items that are below a predetermined minimum level in order to avoid undue cost in maintaining the relevant records, which includes tracking the where abouts of the asset. The definition and recognition criteria can also be applied to spare parts, although these are often carried as inventory and expensed as and when utilized. However, major spare parts are usually recognized PPE when an entity expects to use them during more than one period.

3.2 Safety and environmental equipment

• • The acquisition of such property, plant and equipment, although not directly increasing the future economic benefits of any particular existing item of PPE, may be necessary for an entity to obtain the future economic benefits from its other assets.
  • Such items of PPE qualify for recognition as assets because they enable an entity to derive future economic benefits from related assets in excess of what could be derived had those items not been acquired.
    For example, a chemical manufacturer may install new chemical handling processes to comply with environmental requirements for the production and storage of dangerous chemicals; related plant enhancements are recognized as an asset because without them the entity is unable to manufacture and sell chemicals.
  • However, the resulting carrying amount of such an asset and related assets is reviewed for impairment in accordance with AS-28, Impairment of Assets.

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4. Initial measurement

Once an item of property, plant and equipment qualifies for recognition as an asset, it will be initially measured at cost.

4.1 What is cost?

The cost of items of PPE comprises:

• • Purchase price, including import duties, non-refundable purchase taxes, less trade discounts and rebates.
  • Costs directly attributable to bringing the asset to the location and condition necessary for it to be used in a manner intended by management.
  • Initial estimates of cost of dismantling/decommissioning, removing, and site restoration at present value if the entity has an obligation that it incurs on acquisition of the asset or as a result of using the asset other than to produce inventories. AS-29 prescribes the discounting of such provisions and provision is made at present value by applying pretax discount rate.

Example 6: NDA Ltd. has put plant in 2010 on leasehold land; the leasehold period is 15 years. The NDA Ltd. has to dismantle the plant removing from the leasehold land and restore the leasehold land at the same position at the time of inception of lease. The estimated cost of dismantling the plant after 15 years will be ` 20 crores

The pretax rate of the time value of money and risk specific to the liability is 10%. Calculate the amount to be included in the cost of the plant,

The PV of cost of dismantling of the Plant to be paid after 15 years = 20 crores/1.1015 = ` 4,78,78,410

This amount to be included in the cost of the Plant in 2010

Examples of directly attributable costs include:

• • Employee benefits of those involved in the construction or acquisition of an asset
  • Cost of site preparation
  • Initial delivery and handling costs
  • Installation and assembly costs
  • Costs of testing, less the net proceeds from the sale of any product arising from test production
  • Borrowing costs to the extent permitted by AS-16, Borrowing Costs
  • Professional fees.

Examples of costs that are not directly attributable costs and therefore must be expensed in the profit and loss statement include:

• • Costs of opening a new facility (often referred to as preoperative expenses)
  • Costs of introducing a new product or service including Advertising and promotional costs
  • Costs of conducting business in a new location or with a new class of customer
  • Training costs
  • Administration and other general overheads
  • Costs incurred while an asset, capable of being used as intended, is yet to be brought into use, is left idle, or is operating at below full capacity
  • Initial operating losses
  • Costs of relocating or reorganizing part or all of an entity’s operations
  • The income and related expenses of operation that are incidental to the construction or development of an item of PPE should be recognized in the income statement. For example, income may be earned through using a building site as a car park until construction starts. Because incidental operations are not necessary to bring an item to the location and condition necessary for it to be capable of operating in the manner intended by management, the income and related expenses of incidental operations are recognized in profit or loss and included in their respective classifications of income and expense.

4.2 Cost of dismantling/decommissioning

• • The elements of cost to be incorporated in the initial recognition of an asset are to include the estimated costs of its eventual dismantlement (‘decommissioning cost’). That is, the cost of the asset is “grossed up” for these estimated terminal costs, with the offsetting credit being posted to a liability account.
  • It is important to stress that recognition of a liability can only be affected when all the criteria set forth in AS-29 for the recognition in provisions are met.
  • It seems odd to capitalize decommissioning costs that are not going to emerge until later in the asset’s life. However, if there is an obligation as a direct consequence of acquiring or constructing property, plant and equipment to incur further costs in the future that cannot be avoided.
  • A provision is recognized in accordance with AS-29. Therefore, the decommissioning costs at the end of the asset’s life are just as much a cost of acquiring or constructing the asset as the costs incurred at the start of the asset’s life.
  • Decommissioning or similar costs such as dismantling expenditure can often arise in connection with operating leases and leasehold improvements.

For example, the terms of an operating lease may allow the tenant to tailor the property to meet their specific needs by, say, building an additional internal wall, but on condition that the tenant returns the property at the end of the lease in its original state, this will entail dismantling the internal wall. On building the internal wall, the tenant creates an obligation to remove the wall, which it cannot avoid, therefore, must recognize a provision for that obligation in accordance with AS -29. The cost to the tenant, therefore, of the leasehold improvement is not only the cost of building the wall, but also the cost of restoring the property at the end of the lease by dismantling the internal wall. As such, both costs are capitalised when the internal wall is built and will be recognized in the profit and loss account over the useful life of the asset (generally the expected lease term) as part of the depreciation charge.

Examples of decommissioning costs that may be capitalised as part of the cost of the asset typically arise in oil and gas and electricity industries where environmental damage is caused by, say the construction and commissioning of the facility (for example, the oil platform, as in the example referred to above, or nuclear plant). Similar costs are incurred in other industries such as: abandonment costs in the mining and extractive industries; clean up and restoration costs of landfill sites and environmental; cleanup costs in the number of industries.

• • It is to be noted that estimated cost of dismantling is to be included in the cost of the property, plant and equipment will be at its present value as per AS-29.

4.3 Cost of self-constructed asset

The cost of a self-constructed asset is determined using the same principles as for an acquired asset. If an entity makes similar assets for sale in the normal course of business, the cost of the asset is usually the same as the cost of constructing an asset for sale (AS- 2). Therefore, any internal profits are eliminated in arriving at such costs. Similarly, the cost of abnormal amounts of wasted material, labour, or other resources incurred in self-constructing an asset is not included in the cost of the asset. AS-16 Borrowing Costs establishes criteria for the recognition of interest as a component of the carrying amount of a self-constructed item of property, plant and equipment.

4.4 Exchange of assets

AS-10 specifies that exchange of items of PPE, regardless of whether the assets are similar, are measured at fair value of asset given up or asset acquired if it is more evident unless:

(a) the exchange transaction lacks commercial substance or

(b) the fair value of neither of the assets exchanges can be measured reliably.

If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up.

Whether an exchange transaction has commercial substance depends on the extent to which the reporting entity’s future cash flows are expected to change as a result of the transaction. If the expected cash flows after the exchange differ from what would have been expected without this occurring, the exchange has commercial substance and is to be accounted for at fair value. If the transaction does not have commercial substance, or the fair value of neither the asset received nor the asset given up can be measured reliably, then the asset acquired is valued at the carrying amount of the asset given up and adjustment for settle-up paid or received in cash or a cash equivalent, this is often referred to as boot.

Example 7: Induga Ltd. exchanges car X with a book value of ` 13,000 having a fair value of ` 13,250 for cash of ` 150 and car Y which has a fair value of ` 13,100. The transaction lacks commercial substance as the company’s cash flows are not expected to change as a result of the exchange; it is in the same position as it was before the transaction.

The Induga Ltd. recognizes the assets received at the book value of car X. Therefore, it recognizes cash of ` 150 and car Y as property, plant and equipment with a carrying value of ` 12,850.

Example 8: J & Co. exchanges an automobile with a carrying value of ` 2500 with S & Co. for a tooling machine with a fair market value of ` 3200. No boot is exchanged in the transaction. The fair value of the automobile is not readily determinable.

In this case, J & Co. has recognized a gain of ` 700 (3200-2500) on the exchange, and the gain should be included in the determination of net income. The entry to record the transaction would be as follows:

Machine	Dr.	` 3200
	To Automobile			` 2500
	To Gain on exchange of automobile			`  700

4.5 Measurement of cost

The cost of an item of PPE is the cash price equivalent at the recognition date. If payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognized as interest over the period of credit unless such interest is capitalised in accordance with AS-16.

The cost of an item of PPE held by a lessee under a finance lease is determined in accordance with AS-19.

4.6 Cost of Bearer Plants

Bearer plants are accounted for in the same way as self-constructed items of property, plant and equipment before they are in the location and condition necessary to be capable of operating in the manner intended by management.

5. Subsequent costs

• • The issue is whether subsequent expenditure is capital expenditure (i.e., to the Balance Sheet) or revenue expenditure (i.e., profit or loss statement).
  • An entity does not recognize in the carrying amount of an item of PPE the costs of the day-to-day servicing of the item. Rather, these costs are recognized in profit or loss as incurred. Costs of day-to-day servicing are primarily the costs of labour and consumables, and may include the cost of small parts. The purpose of these expenditures is often described as for the ‘repairs and maintenance’ of the item of property, plant and equipment.
  • To qualify for capitalization, cost must be associated with incremental benefit for example, modification to the asset made to extend its useful life or to increase its capacity would be capitalised. Similarly if the expenditure results in an improve quality of output or results in saving the cost it will qualify for capitalization.

5.1 Part replacement

• • Some items (e.g. aircraft, ships, gas, turbine etc.) are series of linked parts which require regular replacement at different intervals and so have different useful lives.
  • The cost of such regular replacement is capitalised, if the recognition criteria are met.
  • The carrying amount of replaced parts (old parts) is derecognized (i.e., treated as a disposal)

5.2 Major inspection/overhaul costs

• • Performing regular major inspections for faults, regardless of whether parts of the item are replaced, may be a condition of continuing to operate an item of PPE (e.g. an aircraft).
  • The cost of each major inspection performed is recognized in the carrying amount (capitalised), as a replacement, if the recognition criteria are satisfied.
  • Any remaining carrying amount of the cost of the previous inspection (as distinct from physical parts) is derecognized.

5.3 Changes in existing Decommissioning, Restoration and Other Liabilities

The cost of property, plant and equipment may undergo changes subsequent to its acquisition or construction on account of:

• • changes in liabilities,
  • price adjustments,
  • changes in duties,
  • changes in initial estimates of amounts provided for dismantling,
  • removing, restoration and similar factors and included in the cost of the asset.

If the related asset is measured using the cost model:

• • Changes in the liability should be added to, or deducted from, the cost of the related asset in the current period.
  • The amount deducted from the cost of the asset should not exceed its carrying amount. If a decrease in the liability exceeds the carrying amount of the asset, the excess should be recognised immediately in the statement of profit and loss.
  • If the adjustment results in an addition to the cost of an asset, the enterprise should consider whether this is an indication that the new carrying amount of the asset may not be fully recoverable. If it is such an indication, the enterprise should test the asset for impairment by estimating its recoverable amount, and should account for any impairment loss, in accordance with AS-28.

If the related asset is measured using the revaluation model: Changes in the liability alter the revaluation surplus or deficit previously recognised on that asset.

(a) A decrease in the liability should be:

• • • credited directly to revaluation surplus or;
    • In case there is no revaluation surplus on that asset, the decrease in liability should be credited to the statement of profit and loss to the extent earlier P & L was debited and excess should be credited to Revaluation Surplus A/c.

(b) An increase in the liability should be:

• • • debited in statement of profit and loss
    • If revaluation surplus is existing on that asset it should be debited to revaluation surplus, any excess than the revaluation surplus should be debited to statement of profit and loss.

(c) In the event that a decrease in the liability exceeds the carrying amount that would have been recognised had the asset been carried under the cost model, the excess should be recognized immediately in the statement of profit and loss.

6. Measurement subsequent to initial recognition

6.1 Accounting policy

An entity may choose between the cost model and the revaluation model. However, the same policy must be applied to each entire class of PPE. Classes include land, land and buildings, factory plant, aircraft, vehicles, office equipments, fixtures and fittings etc.

6.2 Cost Model

Carry at cost less any accumulated depreciation and any accumulated impairment losses.

6.2 Revaluation Model

• • Carry at a revalued amount, being fair value at the date of the revaluation less any subsequent accumulated depreciation and any accumulated impairment losses
  • To use this model, fair values must be reliably measurable.

7. Revaluations

7.1 Fair value

Land and Buildings – Market value is determined by appraisal normally undertaken by professionally qualified valuers.

Plant and Equipment

• • Fair value is usually market value determined by appraisal.
  • If there is no market based evidence of fair value (e.g. because items are of a specialized nature or rarely sold), fair value is estimated using

– Depreciated replacement cost; or

– An income approach

7.2 Frequency

• • Revaluation must be made sufficient regularity to ensure no material difference between carrying amount and fair value at the end of the reporting period.
  • Frequency depends on movements in fair values. When fair value differs materially from carrying amount, a further revaluation is necessary.
  • Items within a class may be revalued on a rolling basis within short period of time provided revaluations are kept up to date.

7.3 Accumulated depreciation

At the date of the revaluation accumulated depreciation is either:

• • Restated proportionately with the change in gross carrying amount so that the carrying amount after revaluation equals is revalued amount.
  • Elimination against gross carrying amount and the net amount restated as the revalued amount.

The latter method is simpler and most commonly used for buildings.

Example 9:	(` in lakhs)
Cost	1000
Accumulated depreciation	(250)
Carrying amount	750

Determine the accounting entries required to restate the carrying amount if revalued at ` 1100 lakhs by elimination method.

	(` in lakhs)
Cost	1100
Accumulated depreciation	–
Carrying amount	1100

			(` in lakhs)
Cost (1100-1000)		Dr.	100
Accumulated depreciation		Dr.	250
To revaluation surplus	(1100-750)		350

Example:	(` in lakhs)
Cost	1000
Accumulated depreciation	(250)
Carrying amount	750

Determine the accounting entries required to restate the carrying amount if revalued at ` 1100 lakhs by using proportionately restatement method.

	(` in lakhs)
Cost (1000 x1100/750)	1467
Accumulated depreciation (250 x 1100/750)	(367)
Carrying amount	1100

		(` in lakhs)
Cost (1467-1000)	Dr.	467
To Accumulated depreciation	(367-250)	117
To Revaluation surplus	(1100-750)	350

8. Increase/decrease due to revaluation

On an asset by asset basis:

• • Increase should be credited directly to owners’ interests under the heading of revaluation surplus in the Balance Sheet. However a revaluation increase must be recognized in profit and loss to the extent that it reverses a revaluation decrease of the asset that was previously recognized as an expense.
  • Decrease should be recognized as an expense in profit and loss. However, a revaluation decrease must be charged directly against any related revaluation surplus, to the extent that it is covered by that surplus.
  • The revaluation surplus may be transferred directly to retained earnings when the surplus is realized (e.g., on disposal of the asset or during the asset’s remaining useful life).

8.1 Accounting Treatment of Revaluation Surplus

When Asset (PPE) is retired or disposed of, the related revaluation surplus may be transferred to retained earnings directly, not through profit or loss, however some of the surplus may be transferred as the Asset (PPE) is used, the amount would be the difference between depreciation based on revalued carrying amount and the original cost of the Asset (PPE), such transfer again not through profit or loss.

9. Depreciation

• • Depreciable amount should be allocated on a systematic basis over useful life.
  • Useful life and residual value must be reviewed at least at each financial year end. If expectations differ from previous estimates the changes are to be accounted for as a change in an accounting estimate. In accordance with AS-5

“Net Profit or loss for the period, Prior Period Items and Changes in Accounting Policies” (i.e., adjusting depreciation charge for current and future periods)

• • Depreciation method should reflect the pattern in which the asset’s economic benefits are consumed.
  • Depreciation charge for each period should be recognized as an expense unless it is included in the carrying amount of another asset.
  • AS-10 does not specify a method to be used.
  • AS-10 requires that each part of an item of PPE that has a cost that is significant when compared to the total cost of the item should be depreciated separately:

– For example, it may be appropriate to depreciate separately air frame and engines of an aircraft.

– Whilst the Standards require identify and depreciate separately significant components mandatory except, where one significant part has a useful life and a depreciation method that is the same as those of another part of the same item of PPE, the two parts may be grouped together for depreciation purpose.

– Standard allows depreciate separately remaining parts that are not significant individually in terms of their cost compared to the total cost of an item.

• • Considering that depreciable amount, residual value and useful life is a matter of estimate, therefore, a change in depreciation method is a change in the techniques used to apply, the entity’s accounting policy to recognise depreciation as an asset’s future economic benefits are consumed. Consequently, it is a change in an accounting estimate and not a change in accounting policy.
  • AS-10 states that the depreciation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. The International Accounting Standard Board (IASB) noted that even though revenue could sometimes be considered to be a measurement of the output generated by the asset, revenue does not, as a matter of principle, reflect the way in which an item of property, plant and equipment is used or consumed. The IASB observed that the price component of revenue may be affected by inflation and noted that inflation has no bearing upon the way in which an asset is consumed.
  • The diminishing balance method is an accepted depreciation methodology as mentioned in Para 64 of AS-10. However, it can be followed if it reflects an accelerated consumption of the future economic benefits.
  • In most of the cases, the reliable estimate of pattern in which asset future economic benefits are expected to be consumed by the entity cannot be made and therefore, by taking inference from Para 72 of AS-26 the straight-line method can be used as a matter of default.

9.1 Depreciable amount

The Depreciable amount of an Asset shall be allocated over its useful life on systematic basis.

• • Factors to be considered:

– Expected usage assessed by reference to expected capacity or physical output;

– Expected physical wear and tear (depends on operational factors e.g. number of shifts, repair and maintenance programme, etc.)

– Technical obsolescence arising from changes or improvements in production;
or changes in market demand for product or service output.

– Legal or similar limits on the use (e.g., expiry dates of related leases).

• • Asset management policy may involve disposal of assets after a specified time therefore useful life may be shorter than economic life.
  • Repair and maintenance policies may also affect useful life (e.g., by extending it or increasing residual value) but do not negate the need for depreciation.

9.2 Residual value

• • It is estimated value of depreciable assets at the end of its useful life.
  • Depreciable amount is net of residual value. Residual value is often insignificant and immaterial to the calculation of the depreciable amount.
  • Depreciation is always recognized, even if fair value exceeds carrying amount, except when residual value is greater than carrying amount (in which case the depreciation charge is zero).

9.3 Depreciation period

• • Depreciation commences when an asset is available for use.
  • Depreciation ceases at the earlier of the date the asset is:

– derecognised and

– retired from active use and held for disposal

• • Depreciation does not cease when an asset is idle or retired from active use (unless it is fully depreciated). However, depreciation may be zero under the “units of production method”.

9.4 Land and buildings

• • These are separable assets and are separately accounted for, even when they are acquired together:

– Land normally has an unlimited useful life and is therefore not depreciated.

– Buildings normally have a limited useful life and are depreciable asset.

• • Where land has a limited useful life (e.g., a landfill site, mine, quarry) it is depreciated.

9.5 Depreciation methods

• • Straight line – a constant charge over useful life
  • Diminishing balance – a decreasing charge over useful life
  • Sum of the units – charge based on expected use or output
  • Review periodically and, if significant, change method to reflect a change in pattern of consumption of future benefits. Account for as a change in accounting estimate and adjust depreciation charge for current and future period.

A depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate. The revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits of the asset. For example, revenue is affected by other inputs and processes, selling activities and changes in sales volumes and prices. The price component of revenue may be affected by inflation, which has no bearing upon the way in which an asset is consumed.

9.6 Review of depreciation method

 The depreciation method should also be reviewed at least of each financial year end and, if there has been a significant change in the expected pattern of consumption of the future economic benefits from those assets, the method should be changed to suit this changed pattern. When such a change in depreciation takes

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