Application of Ind AS 16 Property, plant and equipment

Objective

1. Prescribe accounting treatment for PPE

2. So that users can discern info about entity’s investment in PPE and changes thereof

3. Principal issues governed:-

a. Recognitionof asset

b. determination of carrying amount

c. Depreciation and impairment loss to be recognized

Scope

1. Shall be applied in accounting for PPE, except when other standard permits other treatment

2. Entity accounting for IP under Ind AS 40, shall use cost model in this standard

Recognition

1. Cost of an item of PPE shall be recognized as asset only and only if:-

a. Probable that future economic benefit(FEB) will flow to the entity

b. Cost can be measured reliably

2. Standard does not provide unit of measure of recognition, judgment is required.For ex, individually insignificant items can be aggregated to apply the criteria to the aggregate value

3. Recognition criteria shall be applied each time the cost is incurred. It include cost incurred initially to acquire or construct an item of PPE and cost subsequently incurred to add to, replace part of, or service it.

Initial Costs

1. Item of PPE acquired for safety or environmental reasons qualifies for recognition as they enable the entity to derive FEB from related asset in excess of what could be derived had those item not been acquired

Subsequent costs

1. Cost of day to day servicing(repairs and maintenance) i.e., cost of labour, consumables , cost of small parts are recognized in P&L as incurred

2. An item of PPE may require replacement at regular intervals and may also be acquired to make less frequently recurring replacement. This cost is recognized in the carrying amount of PPE, if recognition criteria is met. The carrying amount of replaced part is derecognized

3. There may be a condition to perform major inspection for faults to continue to use the asset regardless of whether parts of item are replaced.

If recognition criteria are met, such cost is recognized in the carrying amount of item of PPE as replacement and any carrying amount of cost of previous inspection is derecognized. This occurs regardless of whether the cost of the previous inspection was separately identified in the transaction in which the item was acquired or constructed. If necessary, the estimated cost of a future similar inspection may be used as an indication of what the cost of the existing inspection component was when the item was acquired or constructed.

Measurement at recognition

1. An item of PPE that qualifies for recognition as an asset, shall be measured at its cost

Elements of cost

2. Cost of an item of PPE comprises:-

a. Purchase price + nonrefundable taxes – trade discounts and rebates

b. Any cost direclty attributable to bringing the asset to the location and condition necessary for it to be capable of operating as intended by management

c. The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located

3. Examples of directly attributable cost:-

Cost of employee benefits(arising directly from construction or acquisition of PPE) + cost of site preparation + initial delivery and handling cost +installation and handling cost + cost of testing less net proceed from selling +professional fees

4. Examples of cost not directly attributable :-

Cost of opening a new facility+cost of introducing a new product or service+cost of conducting business in new location+admin and other general o/h

5. Recognition of cost in the item of PPE ceases when the PPE is capable of operating as intended by management

For ex. Item capable of operating as intended by mngt. but not yet brought to use or operated at less capacity + Initial operating losses, when there is no demand + cost of reallocating or reorganizing operations

6. Operations in connection to construction or development of PPE but not necessary to bring the asset to the location and condition necessary for it to be capable of operating as intended by mngt. shall be recognized in profit or loss. Ex. using building site as a car park until construction starts

7. If an item of PPE is self-constructed , then actual cost incurred should be considered. Any internal profits, 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. Bearer plants are accounted for in the same manner.

Measurement of cost

8. Cost of an item is cash price equivalent at the recognition date. Difference b/w actual price paid and cash price equivalent is recognized as interest over the period of credit unless interest is capitalized as per Ind AS 23 (Refer Annexure 1 for example)

9. Cost of an item of PPE held under a finance lease is determined in accordance with Ind AS 17

10. If an PPE is acquired through exchange, then cost of PPE=fair value of PPE along with any exchange of cash unless;-

a. Exchange transaction lacks commercial substance

b. Fair value of neither the asset received nor the asset given up is reliably measured

11. Commercial substance is seen by considering the extent to which its future cash flows are expected to change as a result of transaction

An exchange has commercial substance if :-

a. the configuration of the cash flows of the asset received is different to that of the asset transferred, or

b. Due to exchange the entity-specific value of the portion of the entity’s operations affected by the transaction changes, and

c. The difference in (a) or (b) is significant relative to the fair value of the asset exchanged (Refer Annexure 2 for example)

The entity-specific value of the portion of the entity’s operations affected by the transaction shall reflect post-tax cash flows

12. Fair value can be reliably measurable if, the variablity in the range of reasonable fair value measurement is not significant for that asset, or

The probability of various estimates within the range can be reasonably assessed and used for measuring fair value

Measurement after recognition

1. Entity can use either cost model or revaluation model as its accounting policy and shall apply the same to entire class of PPE

Cost model

After recognition, PPE shall be carried at cost less accum depreciation less any impairment losses

Revaluation model

After recognition, PPE shall be carried at revalued amount i.e., Fair vlaue at the date of revaluation less any subsequent accumulated depreciation less any subsequent impairment losses

Revaluations shall be made with sufficient regularity so that the carrying amount does not differ materially from the fair value at the end of the reporting period. For items having significant volatile changes, there is annual revaluation which is not neccesary for insignificant changes. Instead, it may be necessary to revalue the item only every three or five years.

2. Revaluation can be done in two ways:- (Refer annexure 3 for example)

a. the gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset.

b. The accumulated depreciation is eliminated against the gross carrying amount of the asset.

3. If an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs shall be revalued.

4. In case of upward revaluation, the increase shall be recognised in OCI and accumulated in equity under the heading of revaluation surplus

5. In case of upward revaluation, it will be;-

a. First recognized in profit and loss a/c to the extent it reverses perious decrease recognized in profit and loss a/c

b. Rest shall be accounted for as described in point 4

6. In case of downward revaluation, it will be adjusted against:-

a. already existing Revaluation reserve of same class then

b. the excess shall be recognized in profit or loss a/c

7. When the asset is de-recognized, RR shall be transferred to retained earnings

8. The effects of taxes on income, if any, resulting from the revaluation of PPE are recognised and disclosed in accordance with Ind AS 12, Income Taxes.

Depreciation

1. Each part of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separately

2. The above point give rises to component based accounting

a. Each part of PPE with a cost that is significant in relation to the total cost of the item shall be separately identified and separately depreciated Major inspection cost are considered as component of PPE

b. Components with same depreciation method and same useful life should be combined

c. Subject to recognition principle, if components are replaced/derecognised, then such component should be eliminated from asset and new component should be recognized (Also refer point 3 in subsequent cost)

3. Depreciation charge for each period shall be recognized in profit and loss unless included in the carriying amount of other asset like inventory

Depreciation amount and method

1. Depreciable amount of the asset shall be allocated on a systematic basis over its useful life

2. Residual life and useful life shall be reviewed at least at each financial year end, if case of any change shall be accounted for as a change in accounting estimate in accordance with Ind AS 8

3. Depreciation should be charged each year even if the asset fair value is more than the carrying amount

4. Deprecation shall be zero in case the asset residual value increases to an amount equal to or greater than carrying amount until it subsequently decreases to below carrying amount

5. Depreciation should start once asset is ready for intended use

6. Useful life is part of economic life of the asset and is estimated by management based on :-

a. Wear and tear expected

b. Technical obsolescence

c. Legal limits to use of asset

7. Depreciation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.

It can be SLM, WDV or unit of production method(Revenue based ratio is not correct estimation)

8. Depreciation method shall be reviewed at least at each financial year end, if case of any change shall be accounted for as a change in accounting estimate in accordance with Ind AS 8

9. Depreciation of an asset ceases at the earliest of the date when the asset is classified as held for sale as per Ind AS 105 and the date asset is derecognized

Impairment

1. Whether an item of property, plant and equipment is impaired, an entity applies Ind AS 36, Impairment of Assets

Derecognition

1. Carrying amount of an item of PPE is derecognized

a. on disposal

b. no future economic benefit is expected from its use or disposal

2. Gain or loss on derecognition = net disposal proceeds – carrying amount

3. Gain or loss on derecognition shall be transferred to Profit and loss a/c

Disclosures

1. Measurement basis of PPE should be disclosed (How cost is calculated)

2. Reco statement of PPE

Opening balance + Addition – Deletion = Closing balance

3. Reco statement of Depreciation

Opening balance + Addition – Deletion = Closing balance

4. Revaluation policy to be disclosed

5. Restrictions on PPE, its title and usage to be disclosed

Annexure 1
PPE purchased as on 1/6/2015 on credit to be paid in two installments
Purchase price	60 Lakhs
Discount rate	11%
Cost at initial recognition		60/(1.11)^2 = 48.7 lakhs
Interest to be recognized over period of credit = 60 lakhs – 48.7 lakhs = 11.3 lakhs
Journal Entries			(Amount in Lakhs)
1/6/2015	PPE a/c dr.		48.7
	To Payable A/c			48.7
31/3/2016	Finance charge A/c Dr.		4.46		(48.7 lakhs * 11% * 10/12)
	To Payable A/c			4.46
31/3/2017	Finance charge A/c Dr.		5.84		{(48.7 lakhs + 4.46 lakhs) * 11% * 12/12}
	To Payable A/c			5.84
31/5/2017	Finance charge A/c Dr.		1		(Balancing figure = 11.3 – 4.46 – 5.84 )
	To Payable A/c			1
31/5/2017	Payable A/c Dr.		60
	To bank A/c			60

Annexure 2
Company owns asset A, it exchnages the asset for asset B whose fair value is Rs. 205 lakhs, both the assets has following configuration of cash flows Assuming discount rate to be 10%
Period	Amount(In Lakhs)
	Asset A	Asset B
Year 1	–	10
Year 2	50	30
Year 3	50	30
Year 4	60	40
Year 5	70	40
Year 6	70	50
Year 7	–	60
Entity specific value
Period	DF@10%	Cash Flows		Entity Specific Value
		Asset A	Asset B	Asset A	Asset B
Year 1	0.909091	–	10	–	9.09090909
Year 2	0.826446	50	30	41.32	24.7933884
Year 3	0.751315	50	30	37.57	22.539444
Year 4	0.683013	60	40	40.98	27.3205382
Year 5	0.620921	70	40	43.46	24.8368529
Year 6	0.564474	70	50	39.51	28.2236965
Year 7	0.513158	–	60	–	30.7894871
Total				202.85	167.594316
In the above example,
a. The configuration of the cash flows of asset transferred is different to that of asset received and the difference is relative to the fair value of asset exchanged
b. Also the entity-specific value of the portion of the entity’s operations is affected due to exchange and the difference is relative to the fair value of asset exchanged. Hence the transaction has commercial substance

Annexure 3
Revaluation entries
Cost	1000
Accumulated  Depreciation	400
WDV	600
Fair value	1500
Method 1	Amount in Lakhs			Method 2	Amount in Lakhs
Asset A/c dr.	1500			Accumulated Depreciation A/c Dr.	400
To accumulated dep a/c		600		To Asset A/c		400
To revaluation reserve a/c		900		(Being accumulated depreciation adjusted against PPE)
(Being PPE revalued)
				Asset a/c dr.	900
				To revaluation reserve		900
				(Being PPE revalued)