SYBCOM SEM III - AS 10 – QUESTIONS AND ANSWERS
Question 1
ABC Ltd. is installing a new plant at its production facility. It has incurred these costs:
1. Cost of the plant (cost per supplier’s invoice plus taxes) Rs.25,00,000
2. Initial delivery and handling costs Rs.2,00,000
3. Cost of site preparation Rs.6,00,000
4. Consultants used for advice on the acquisition of the plant Rs.7,00,000
5. Interest charges paid to supplier of plant for deferred credit Rs.2,00,000
6. Estimated dismantling costs to be incurred after 7 years Rs.3,00,000
7. Operating losses before commercial production Rs.4,00,000
A discount rate of 10% p.a can be assumed, for which the PV factors are as follows:
Year 1 2 3 4 5 6 7
Disc 0.909 0.826 0.751 0.683 0.621 0.564 0.513
Factor
Please advise ABC Ltd. on the costs that can be capitalized in accordance with AS 10 (Revised).
Answer
According to AS 10 (Revised), these costs can be capitalized:
1. Cost of the plant Rs. 25,00,000
2. Initial delivery and handling costs Rs. 2,00,000
3. Cost of site preparation Rs. 6,00,000
4. Consultants’ fees Rs. 7,00,000
5. PV of Estimated dismantling costs to be incurred after 7
years ( 3,00,000 * 0.513 ) Rs. 1,53,900
Rs. 41,53,900
Note: Interest charges paid on “Deferred credit terms” to the supplier of the plant (not a qualifying asset) of
Rs.2,00,000 and operating losses before commercial production amounting to Rs.4,00,000 are not regarded as
directly attributable costs and thus cannot be capitalized. They should be written off to the Statement of Profit
and Loss in the period they are incurred.
Question 2
Determine if the following costs can be added/subtracted to the invoiced purchase price for the initial
recognition of the cost of the asset:
1. Consultants fees for choosing the new asset
2. A trade discount received of 5% of the purchase price of the asset
3. A discount received for paying the invoice within 90 days
4. Interest paid on a short term loan taken to provide the necessary cash for payment of the purchase price
5. Import duties paid
6. Shipping costs and cost of road transport
7. Insurance for the shipping
8. Operating cost incurred after installation
9. Cost of laying a new concrete slab and installing special rubber mounted footings for the new press in
order to reduce vibration during use.
10. Hire of a crane to transfer the press from the vehicles into the factory
11. Costs associated with removing a section of the factory roof to allow the machine to be dropped into place
and subsequently refitting the roof
12. Cost of installing soundproofing in the roof at the same time in order to provide protection for workers in
other parts of the factory building
13. Professional fees charged by consulting engineer for overseeing the installation process
14. Electricians fees for connecting the press to the power supply
15. A portion of the operating costs (salaries, office expenses) of the purchasing department
16. Costs of materials (papers and inks) used in calibrating the machine and setting it up for operation
17. Costs of training the operators of the new machine
18. A portion of the inefficiencies in production for the first month of use while the operators became
comfortable with using the machine.
Answer
Included in Cost:
Point no. 1,2,5,6,7,9,10,11,13,14 and 16
Excluded from Cost:
Point no. 3,4,8,12,15,17 and 18
Question 3
A Ltd. has carried out certain works on various machines in their engineering plant, which manufactures high
quality metal patterns and templates for use in industry.
Determine in each case whether the costs of the improvements can be added to the existing carrying value of
the assets concerned?
1. The cost of an annual machine maintenance which will maintain the originally assessed standard of
performance of the machine for the coming 12 months.
2. Modifications to a cutting machine which will increase its rate of output from 500 to 560 patterns per shift.
3. Modifications to a lathe which will replace the current water-cooling system with an oil- based system,
thereby extending the life of the lathe by a forecast 2 years.
4. The upgrading of a cutting machine with new software which will improve the accuracy of its measurement
and cutting tolerances by a number of microns, thereby raising the quality of output.
5. Alterations to a production line which will allow automatic feeding from a machine to the next one in the
production process, thereby removing the need for an employee to manually load the second machine.
Answer
Point 1: No. This may not be capitalized as subsequent expenditure, since it merely maintains the originally
assessed standard of performance of the asset.
When expenditure is incurred to restore the asset, such expenditure is added to the carrying amount of the
asset to the extent that it is probable that future economic benefits will flow to the enterprise.
Point 2: Yes. The cost of such modifications may be added to the carrying amount of the asset.
Point 3: Yes. Such costs may be capitalized.
Point 4: Yes. Such costs may be capitalized.
Point 5: Yes. Such costs may be capitalized.
Question 4
An entity bought a plot of land for development of office buildings. Development of the land was scheduled
into six phases. The land scheduled for development in phases five and six was leased to another entity on a
short-term basis as a parking lot for heavy vehicles.
What is the treatment of rental income from car parking lot?
Answer
Rental income from the car park lease is recognized in the Statement of Profit and Loss for the period.
The car park activity is incidental to the entity’s principal activity of property development. Operations that
are incidental to the construction or development of property, plant and equipment are not necessary to bring
the asset to its working condition for its intended use.
The income and related expenses of incidental operations are recognized in the Statement of Profit and Loss
for the period.
Question 5
An entity acquires the right to use an underground cave for gas storage purposes for a period of 50 years. The
cave is filled with gas, but a substantial part of that gas will only be used to keep the cave under pressure in
order to be able to get gas out of the cave. It is not possible to distinguish the gas that will be used to keep the
cave under pressure and the rest of the gas.
Evaluate whether AS 10 would apply or AS 2?
Answer
The total volume of gas must be virtually split into
(i) Gas held for sale, and
(ii) Gas held to keep the cave under pressure.
The former must be accounted for under AS 2 as Inventories. The latter must be accounted for as PPE under
AS 10 and depreciated over the period the cave is expected to be used.
Question 6
Entity A has an existing freehold factory property, which it intends to knock down and redevelop. During the
redevelopment period the company will move its production facilities to another (temporary) site. The
following incremental costs will be incurred:
1. Setup costs of Rs.5,00,000 to install machinery in the new location.
2. Rent of Rs.15,00,000
3. Removal costs of Rs.3,00,000 to transport the machinery from the old location to the temporary location.
Can these costs be capitalised into the cost of the new building?
Answer
These costs are not to be included in the cost of the asset as they are not directly attributable to bringing
the asset to the location and condition necessary for it to be capable of operating in the manner intended
by management. The costs to be incurred by the company do not meet the requirement of AS 10 and
therefore, cannot be capitalised.
Question 7 (Operating costs incurred in the start-up period)
An amusement park has a 'soft' opening to the public, to trial run its attractions. Tickets are sold at a 50%
discount during this period and the operating capacity is 80%. The official opening day of the amusement park
is three months later. Management claim that the soft opening is a trial run necessary for the amusement park
to be in the condition capable of operating in the intended manner. Accordingly, the net operating costs
incurred should be capitalised. Comment.
Answer
The net operating costs should not be capitalised, but should be recognised in the Statement of Profit and
Loss. Even though it is running at less than full operating capacity (in this case 80% of operating capacity),
there is sufficient evidence that the amusement park is capable of operating in the manner intended by
management. Therefore, these costs are specific to the start-up and, therefore, should be expensed as
incurred.
Question 8 (Consideration received comprising a combination of non-monetary and monetary assets)
Entity A exchanges surplus land with a book value of Rs.10,00,000 for cash of Rs.20,00,000 and plant and
machinery valued at Rs.25,00,000. What will be the measurement cost of the assets received?
Answer
Since the transaction has commercial substance. The plant and machinery would be recorded at
Rs.25,00,000, which is equivalent to the fair value of the land of Rs. 45,00,000 less the cash received of
Rs.20,00,000.
Question 9 (Exchange of assets that lack commercial substance)
Entity A exchanges car X with a book value of Rs.13,00,000 and a fair value of Rs.13,25,000 for cash of
Rs.15,000 and car Y which has a fair value of Rs.13,10,000. 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. What will be the measurement cost of the assets received?
Answer
The entity recognises the assets received at the book value of car X. Therefore, it recognises cash of
Rs.15,000 and car Y as PPE with a carrying value of Rs.12,85,000.
Question 10 (Revaluation on a class by class basis)
Entity A is a large manufacturing group. It owns a number of industrial buildings, such as factories and
warehouses and office buildings in several capital cities. The industrial buildings are located in industrial
zones, whereas the office buildings are in central business districts of the cities. Entity A's management
want to apply the revaluation model as per AS 10 to the subsequent measurement of the office buildings
but continue to apply the historical cost model to the industrial buildings.
State whether this is acceptable under AS 10 or not with reasons?
Answer
Entity A's management can apply the revaluation model to the office buildings. The office buildings
can be clearly distinguished from the industrial buildings in terms of their function, their nature and their
general location. AS 10 permits assets to be revalued on a class by class basis.
The different characteristics of the buildings enable them to be classified as different PPE classes. The
different measurement models can, therefore, be applied to these classes for subsequent measurement.
All properties within the class of office buildings must, therefore, be carried at revalued amount.
Question 11
Valuation of fixed assets in special cases.
- Hire Purchase Assets
- Joint Ownership
- Several assets are purchased for a consolidated price
Answer
Para 15 of Accounting Standard 10 on “Accounting for Fixed Assets” states the following provisions
regarding valuation of fixed assets in special cases :
1. In the case of fixed assets acquired on hire purchase terms, although legal ownership does not vest in the
enterprise, such assets are recorded at their cash value, which if not readily available, is calculated by
assuming an appropriate rate of interest. They are shown in the balance sheet with an appropriate narration to
indicate that the enterprise does not have full ownership thereof.
2. Where an enterprise owns fixed assets jointly with others (otherwise than as a partner in a firm), the extent
of its share in such assets, and the proportion in the original cost, accumulated depreciation and written down
value are stated in the balance sheet. Alternatively, the pro rata cost of such jointly owned assets is grouped
together with similar fully owned assets. Details of such jointly owned assets are indicated separately in the
fixed assets register.
3. Where several assets are purchased for a consolidated price, the consideration is apportioned to the various
assets on a fair basis as determined by competent valuers
Question 12
At what value should the assets acquired in exchange or for consideration in kind should be recorded in books
as per AS-10?
Induga Ltd. exchanges car X with a book value of Rs. 13,000 having a fair value of Rs. 13,250 for cash of Rs.
150 and car Y which has a fair value of Rs. 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 Rs.
150 and car Y as property, plant and equipment with a carrying value of Rs. 12,850.
ANSWER
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.
Induga Ltd. exchanges car X with a book value of Rs. 13,000 having a fair value of Rs. 13,250 for cash of Rs.
150 and car Y which has a fair value of Rs. 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 Rs.
150 and car Y as property, plant and equipment with a carrying value of Rs. 12,850.
