Summary of Ind AS-16: Property, Plant And Equipment

Simple Version of Ind As-16: Property, Plant And Equipment Incorporating Companies (Indian Accounting Standards) Amendments Rules, 2022

I hereby summarize the provisions relating to the Ind AS -16: Property, Plant and Equipment Incorporating Companies (Indian Accounting Standards) Amendments Rules 2022 for the sake of the students, Research Scholars and academicians to get a simple knowledge on the subject. Each and every knowledge should support and help your great life Journey.

The relevant Accounting Standards relating to Property, Plant and Equipment are the following:-

1. AS-6, AS-10

2. Ind AS-16

3. IAS-16

There is no major difference between Ind AS-16 AND IAS-16. Following table shows the difference between Ind AS-16  and . IAS-16

Table :1

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

1 .Definition:-

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 and

c. Not held for sale in the normal course of business

2. Does not cover the following Assets

a. Property, plant and equipment classified as held for sale in accordance with Ind AS 105, Non-Current Assets held for sale and Discontinued Operation

b. Biological Assets related to Agricultural activity (IAS 41, Ind AS4 1)

c. the recognition and measurement of exploration and evaluation assets

d. Mineral rights and reserves

However, this Standard applies to property, plant and equipment used to develop or maintain the assets described in (b)⁠–⁠(d).

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

4. Items such as spare parts, stand-by equipment and servicing equipment are recognized in accordance with this Ind AS when they meet the definition of property, plant and equipment. Otherwise, such items are classified as inventory.

5. Componentization

– In case an asset contains parts/ components which could have varying useful life, each part should be recognized separately.

6. Initial measurement, Subsequent Measurement, Depreciation, De recognition, Revaluation and Disclosures are the most important concepts relating this standard.

7. Initial Measurement. (Purchased Asset)

I. At cost.

Cost means the following:-

Purchase price

Less: (i) Trade discounts.

(ii) Rebates

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.

Cost of testing whether the assets is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment).Excess of net sale proceeds of items produced over the cost of testing, if any, shall not be recognized in the profit or loss but deducted from the directly attributable cost. (Companies (Indian Accounting Standards) Amendments Rules 2022)

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.

8. 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

9. 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.

10. 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 settle-up paid or received in cash

11. Subsequent Measurement (in Continuing Years)

Either at

i.Cost Model

or

ii. Revaluation Model

12. Cost Model

At Cost

Less:

i. Accumulated depreciation

ii. Accumulated Impairment losses

13. Revaluation Model.

At Revalued Amount

Revalued Amount=Fair value.

Fair Value =Market value determined by appraisal

14. 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.

15. Treatment of Revaluation.

i. Revaluation Increase –Increase should be shown in

a. Other Comprehensive Income

Plus

b. and accumulated in the statement of changes in equity under the heading revalution surplus

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

If there is a previous revaluation increase in respect of the same asset, the decrease in revaluation shall first be adjusted against the “Revaluation surplus” to the extent of previous revaluation increase in respect of the same asset. The balance, if any, shall be recognized in the statement of profit and loss (debited as expense).The decrease in revaluation reduces the amount accumulated in equity under the head “Revaluation surplus”.

iv. When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings.

16. 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=Cost less Estimated residual value

iii. Following depreciation methods are recognized by this standard

a. Straight line method

b. Diminishing balance method

c. The units of Production Method

Depreciation of Revalued Assets

When a revalued asset is depreciated, there is a further complication .We know that an upward revaluation means that the depreciation charge will increase .Normally a revaluation surplus is realized only when the asset is sold. But when it is depreciated, part of that surplus is realized as the asset is used .The amount of surplus realized is the difference between depreciation charged on the revalued amount and the (lower) depreciation which would have been charged on the asset’s original cost. This amount is transferred to retained earnings but not through statement of profit or loss

17. Derecognition.

PPE should be derecognised when it is

– no longer expected to generate future economic benefit or

– when it is disposed of

• When PPE is to be de recognised, a gain orloss on disposal is to be calculated by comparing the difference between:

– Carrying value on date of disposal

– Disposal proceeds

• If disposal proceeds > carrying value; profit
• If disposal proceeds < carrying value; loss

18. Disclosures in the FS

Accounting policy stating the valuation base used for determining the amounts at which depreciable assets are stated

• Depreciation methods used
• Useful lives or depreciation rates
• Total depreciation allocated for the period
• Gross carrying amount of depreciable assets and the related accumulated depreciation
• Reconciliation of carrying amounts in the beginning and end of the period