A SIMPLE VERSION OF INDAS-16 AND IAS 16 -PROPERTY,PLANT AND EQUIPMENT
The relevant Accounting Standards relating to Property, Plant and Equipment are the following:-
1. AS-6, AS-10
2. INDAS-16 3. IAS-16
There is no major difference between INDAS-16 AND IAS-16.So the following details relate to both INDAS-16 and IAS-16.
Property, Plant and Equipment are fixed assets. They are Tangible assets. Ex:- Land, Building, Plant and Machinery and Office equipment etc.
Statements of Profit and loss and other Comprehensive income, Statement of changes in Equity and Statement of Financial position are the new names of Financial Statements as per IND AS and IAS
Property ,Plant and equipment are 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 one period.
2. Does not cover the following Assets
a. Biological Assets related to Agricultural activity (IAS 41 ,IND AS4 1)
b. Mineral rights and reserves
3. Recognition of Assets.
The cost of an item of PPE that meets the two fundamental recognition criteria must be an Asset
a. Must entail future economic benefits for the entity b.Cost should be measured reliably
b. The criteria apply to initial as well as subsequent expenditure
– In case an asset contains parts/ components which could have varying useful life, each part should be recognized separately.
5 . Initial measurement, Subsequent Measurement, Depreciation, De recognition, Revaluation and Disclosures are the most important concepts relating this standard.
6. Initial Measurement. (Purchased Asset)
I. At cost.
Cost means the following:-
Less: (i) Trade discounts.
Add: (i) Import duties
(ii) Non-refundable purchase taxes
(iii) Legal fees for purchase contract and recording ownership (iv).Tittle guarantee insurance
(v) Directly attributable costs of bringing the assets to working condition such as :-
a. Employee benefit costs
b. Site preparation costs
c. Initial delivery costs
d. Installation Charges
e. Initial handling costs
f. Cost of testing
Less: Sale Proceeds of goods produced in the testing process.
g. Professional fees (Architects,engineers)
h. Transportation costs.
i. Cost of Technical Staff to start operation of the plant.
(vi) Initial estimate of unavoidable cost of dismantling and removing Asset and restoring the site of installation (Using technique of Present Value)
(vii) Borrowing costs.
7. Following Costs should be excluded.
i. Costs of opening new facility
ii. Cost of introducing a new product or service
(Including cost of advertising and promotional activities)
iii. Administration and other genera overheads
iv. Training costs
v. Start-up and other pre-production costs
vi. Initial operating losses
vii. Costs of conducting business in a new location or with a new class of customer.
viii. Costs of relocating or re-organizing part or all of entity’s operations
8. Self Constructed Asset.(initial Measurement)
Cost is determined using the same principles as applicable to a purchased asset. Other concepts are the following:-
i. Eliminate internal profits
ii. Exclude Abnormal wastage
Cost may be the following:-
Purchase of the site
Add: i. Dismantling costs.
ii. Purchase of materials for construction
iii. Relevant employee benefits
iv. Production Overheads
Less: Abnormal Wastage
v. Architects fees
vi. Relevant Interest on loan.
9. Exchange of Assets (initial Measurement).
Valuation of PPE acquired in exchange
i. At fair value
ii. 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 seetle up paid or received in cash
10. Subsequent Measurement .( in Continuing Years)
ii. Revaluation Model
11. Cost Model
Less: i. Accumulated depreciation
ii. Impairment losses
12. Revaluation Model.
At Revalued Amount
Revalued Amount=F air value .
Fair Value =Market value determined by appraisal
13. Important points regarding Revaluation.
i. Regular revaluation
ii. Annual Revaluation for volatile items
iii. Interval between 3-5 years for items with less significant changes
iv. If revaluation model is used ,the entire class of assets must be revalued.
14. Treatment of Revaluation.
i. Revaluation Increase –Increase should be shown in
a. Other Comprehensive Income
b. In Statement of Financial Position under the head equity
ii. However ,the increase shall be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss
iii. Revaluation decrease should be shown as expense in profit and loss Account
iv. When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings .
15. Depreciation .
Important points relating to Depreciation of PPE are the following:-
i. Depreciable amount is allocated on a systematic basis over the asset’s useful life
ii. Depreciable amount=CostEstimated residual value
iii. Following depreciation methods are recognized by this standard
a. Straight line method
b. Diminishing balance method
c. Sum of the units method
16. De Recognition.
PPE should be derecognised when it is
– no longer expected to generate future economic benefit or
– when it is disposed of
– Carrying value on date of disposal
– Disposal proceeds
17. Disclosures in the FS
Accounting policy stating the valuation base used for determining the amounts at which depreciable assets are stated