Practical Discussion on Ind AS 16, Ind AS 105 & Ind AS 8

Ind AS 16 – Property Plant and Equipment, Ind AS 105 – Non –current Assets held for sale and Ind AS 8 – Accounting Policies, Changes in Accounting Estimates and Errors.

Today I am sharing my little understanding on common audit issue I found across almost all the audit client and found ignored most of the times.

ISSUE:

While auditing PPE of the Company we always come across that there are some assets lying in fixed assets register of the entity which are fully depreciated and carried at their salvage value over the years and during the year also some assets gets fully depreciated and carried over at their salvage value and no depreciation is charged on the same during the year as they are already carried at their salvage value. These assets continue to appear in fixed assets register of the company.

Provision of the Ind AS:

After initial recognition of PPE as per Ind AS 16, entity shall choose to measure it subsequently either as per the cost model in paragraph 30 or the revaluation model in paragraph 31 as its accounting policy and shall apply that policy to an entire class of property, plant and equipment.

In case the entity chooses the Cost Model to measure value of the PPE subsequently, these items of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses.

As per Para 50, the depreciable amount of an asset shall be allocated on a systematic basis over its useful life.

As per Para 51, the residual value and the useful life of an asset shall be reviewed at least at each financial year-end and, if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate in accordance with Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors.

Ind AS 105 – Non-current Assets Held for Sale and Discontinued Operations says that an entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use.

For this to be the case, the asset (or disposal group) must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups) and its sale must be highly probable. Thus, an asset (or disposal group) cannot be classified as a non-current asset (or disposal group) held for sale, if the entity intends to sell it in a distant future.

As per Para 15 of Ind AS 105, entity shall measure a non-current asset (or disposal group) classified as held for sale at the lower of its carrying amount and fair value less costs to sell.

As per Para 38 of the Ind AS 105, entity shall present a non-current asset classified as held for sale and the assets of a disposal group classified as held for sale separately from other assets in the balance sheet. The liabilities of a disposal group classified as held for sale shall be presented separately from other liabilities in the balance sheet. Those assets and liabilities shall not be offset and presented as a single amount. The major classes of assets and liabilities classified as held for sale shall be separately disclosed either in the balance sheet or in the notes.

The above disclosures shall be made on the face of the Balance sheet of the Company.

Discussion:

In view of the above provisions, we should ask the client:

Whether the Company has a plan to dispose these assets in near future, if yes, than ensure that these assets are disclosed separately on the face of the balance sheet and related liabilities(if any) at lower of its carrying value and fair value less cost to sell and

if the Company does not have any plan to sell the assets in near future i.e. the Company will continue to use these assets for its operations, than there is a clear error/omission on the part of the Company in assessment or review of assets useful life and/or salvage value in relation to assets which are already being carried at their salvage value from 1^st day of the financial year.

If there is an Error or Omission in assessing useful life or Salvage value of the assets then we should ask the management to quantify the impact of said error or omission and account the same in accordance with Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors i.e. retrospective impact to be given in financials and prepare additional Balance sheet on 1^st day of previous year, if there is material impact on the financials.

And in relation to assets which are fully depreciation during the year under audit, then we need to ask management to review/reassess salvage value and/or useful life of these assets (if not classified as Non-current assets held for sale) and quantify the impact of the said review/reassessment and account the same prospectively as per provision of Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors.

Key Takeaways:

1) While auditing PPE check whether management has reviewed the assets useful life and salvage value at the end of each financial year and also take letter of representation for the same to avoid risk of undetected misstatement.

2) Check whether depreciation is charged on each assets appearing in fixed assets register of the entity and obtained suitable explanation on assets on which no depreciation is charged and check proper disclosure is made as per Ind AS 16 and Ind AS 105 .