Indian Accounting Standard 16 – Property, Plant & Equipment

Ind AS 16 discusses whether expenditure incurred should be should be capitalised as PPE or charged to P&L statement, retirement of PPE, depreciation and disposal of PPE.

Scope

Definitions

I. Property, Plant and Equipment (PPE) – PPE are tangible items which are held for use in producing or supply of goods or services, rentals to others or for administrative purposes and expected to be used during more than a

II. Bearer plant – A bearer plant is a living plant that:

• Is used in the production and supply of agricultural produce;
• Is expected to bear produce for more than a period of 12 months;
• Has remote likelihood of being sold as an agricultural produce, except for incidental scrap sale

For example, tea bushes are bearer plant whereas the tea leaves are an agricultural produce. Recognition & Measurement

Initial Recognition – At the time when cost is incurred

The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:

• It is probable that future economic benefits associated with the item will flow to the entity; and
• The cost of the item can be measured reliably.

Costs are incurred:

• At the time of initial acquisition or self-construction of the PPE;
• Subsequently to add/increase to the existing PPE, replace a part or service it.

Note:

• General administration and other overhead expenses are usually excluded from the cost as they are not related to a specific asset. However, any expense which is directly attributable to an asset shall be included in the cost of the asset.
• All expenses incurred (including borrowing cost) incurred between the date of ready to use and actual commencement of commercial production should be charged to profit & loss statement.

Machinery spares

Machinery spares should be recognised as PPE only when it satisfies the definition of PPE. If such spares do not satisfy the definition of PPE, then it should be classified as inventory and charged to P&L when issued for usage.

Component Accounting

If an item of property, plant and equipment comprises of two or more significant components, with substantially different useful lives, usage or flow of economic benefits then such component should be recognised and depreciated separately over its respective useful life. For e.g. a building may be split into various components such as structural design, elevators, heating system and water system.

Subsequent Expenditure

Major inspections

A condition of continuing to operate an item of PPE (for example, an aircraft) may be performing regular major inspections for faults regardless of whether parts of the item are replaced. When each major inspection is performed, its cost is recognised in the carrying amount of the item of PPE as a replacement if the recognition criteria are satisfied.

Subsequent Recognition – At the reporting date

An entity shall choose an accounting policy out of the two models available after initial recognition. The management has to take a call on the method of accounting:

Revaluation shall be performed for entire class of PPE such as plant & machinery or buildings or lands. Entity can follow revaluation model for select class of PPE like only buildings and for rest can follow the cost model.

Derecognition of PPE

• Cost Model – Profit/Loss on disposal should be transferred to P&L.
• Revaluation Model –
  • Profit/Loss on disposal should be transferred to P&L;
  • If any revaluation surplus exists – transfer the same to General Reserve.

Depreciation

• Depreciation is the systematic allocation of depreciable amount of an asset over its useful life.
• Depreciation of an asset begins when it is available for use e. it is in the condition and location necessary for its operation.
• The depreciation method used should reflect the pattern in which the future economic benefits of the assets are expected to be consumed by the entity. The standard does not prescribe any specific method of depreciation method to be followed.

First time adoption

Deemed cost of PPE

A first time adopter has the following options available to measure the PPE at deemed cost:

• Measure all of its PPE at fair value on the date of transition as deemed cost.
• If there is no change in the functional currency then it can elect to continue with the carrying value of all of its PPE as on the date of transition measured as per previous GAAP and use it as deemed cost.