APPLICATION GUIDANCE

TO

NAS16 PROPERTY, PLANT AND EQUIPMENT

ACCOUNTING STANDARDS BOARD (ASB)

NEPAL

ASB-NEPAL 2

PREFACE

The Board has decided to release Application Guidance Series on various NAS & NFRS. The purpose of the Application Guidance Series is to explain and illustrate various aspects of a financial reporting standard to introduce clarity on certain frequently asked questions and hardship faced by the preparer in implementing different paragraphs of the standard in the process of IFRS convergence.The first application guidance on the series is NAS 16 Property, Plant and Equipment.

The standard contains various new dimensions regarding–

• Applicability of the standards • Meaning costs and exclusion of certain items from cost • Componentisation model • Annual review of residual value and useful life • Capitalisation of site restoration costs • Application of revaluation model

Thisapplication guidance clarifies various critical issues of this standard by examples. It inter alia provides guidance to componentisation of assets, determination of useful life and decommissioning.

We thank Dr. T.P.Ghosh who has prepared this Application Guidance.

Accounting Standard Board

Nepal

ASB-NEPAL 3

CONTENTS

Page

1. Introduction 6

2. Scope of NAS 16 6

3. Definitions

3.1 Definition of Property, Plant and Equipment

3.2 Definition of Cost

6

7

7

4. Initial Recognition 8

5. Component-wise recognition of PPE

5.1 Treating components of PPE as assets rather than inventories

5.2 Repairs and maintenance

5.3 Inspection costs

8

10

10

11

6. Measurement principle 11

7. Details of Cost

7.1 Costs of self-constructed assets

7.2 Interest on defer payment

7.3 Capitalisation of decommissioning expenses

12

16

19

20

8. Exchange of Assets 23

9. Measurement after initial recognition

9.1 Application of revaluation model

23

24

10. Depreciation

10.1 Residual value

10.2 Useful life

10.3 Commencement and cessation of depreciation

10.4 Principles of depreciation charge

26

27

27

27

29

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11. Derecognition of PPE

11.1 Gain or loss arising from derecognition of PPE

30

32

12. Compensation for impairment loss 32

13. Restored PPE 32

14. Disclosures 32

Appendix 1 Guidance to determination of useful life of assets 35

Appendix II Guidance to Componentisation of Assets 40

List of Examples

Page

Example 1 Cost of PPE in share-based transaction 7

Example 2 Components and major parts 9

Example 3 Purchase price of PPE 13

Example 4 Cost of self-constructed assets 16

Example 5 Commencement of capitalisation of expenses in self-constructed assets

17

Example 6 Defer payment 19

Example 7 Decommissioning expenses 21

Example 8 Revaluation and deferred tax 26

Example 9 Componentisation and depreciation 28

Example 10 Deferred receivables arising out of derecognition of PPE 31

List of Figure

Page

Figure 1 Components and Parts of a complex asset 9

ASB-NEPAL 5

List of Table

Page

Table 1 Treatment of spare parts and stand-by equipment 11

Table 2 Checklist of costs to be included and excluded 15

Table 2 Fair value measurement of PPE 24

Table 3 Accounting for revaluation gain or loss 25

ASB-NEPAL 6

Application Guidance to

NAS16 Property, Plant And Equipment

1. Introduction

The purpose of this Application Guidance is to explain and illustrate NAS 16 Propert, Plant and Equipment to facilitate understanding and application of the standard . Issues relating to first time adoption of NAS 16 has been discussed in a separate Application Guidance.

2. Scope of NAS 16

NAS 16 Property, Plant and equipment does not apply to –

(a) property, plant and equipment classified as held for sale in accordancewith IFRS 5 Non-current Assets Held for Sale and Discontinued Operations; [Refer: NFRS 5 Paragraphs 6–14] (b) biological assets related to agricultural activity (refer toNAS 41 Agriculture); (c) the recognition and measurement of exploration and evaluation assets (refer to NFRS 6 Exploration for and Evaluation of Mineral Resources); or (d) mineral rights and mineral reserves such as oil, natural gas and similarnon-regenerative resources. However, NAS 16 applies to items of property,plant and equipment that an entity uses to develop or maintain (a) biologicalassets and (b) mineral rights and mineral reserves such as oil, natural gas andsimilar non-regenerative resources. The ASB noted that items of property,plant and equipment that an entity uses for these purposes possess the samecharacteristics as other items of property, plant and equipment. But investmentproperty is accounted for in accordance with NAS 40. As per NAS 40 in the following two cases investment property is accounted for applying NAS 16:

(i) when an entity is applying fair value model after initial recognition but fair value of an investment property cannot be reliably measured ( see Paragraphs 53 and 53A of NAS 40) ; and

(ii) when an entity opts for cost model in accordance with Paragraph 56. [Refer to Paragraphs 3-5, NAS 16]

3. Definitions

In NAS 16.5 various relevent terms are defined. Of which the following two terms are explained below :

• Property, Plant and Equipment • Cost.

Depreciation, residual value and useful life are discussed in Paragraph 10 of this Guidance.

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3.1 Definition of Property, Plant and Equipment

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.

Certain property which are given on rental are classified as investment property in which case NAS 40 will apply. Tangible items which are having useful life of more than one period is only treated as PPE as per NAS 16. The words “ more than one period” would imply more than one accounting period of 12 months.

Also an entity shall determine a threshold limit commensurate to its size for recognizing a tangible item as PPE. For example, a tangible item of insignificant amount although satisfies definition of PPE may be expensed.

3.2 Definition of Cost

Costis the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction or where applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other NFRSs, e.g. NFRS 2 Share-Based Payment. [ Paragraph 6, NAS 16]

When an item of PPE is received in an equity settled share based transaction, it is measured at fair value of PPE. If the fair value of PPE cannot be reliably estimated, then the transaction is measured at the fair value of equity.

Example 1[ Cost of PPE in share-based transaction]X Ltd. purchased a machinery and 10,000 equity shares of the company has been issued as a consideration. Market price of equity share of par value of NPR 10 is NPR 12.

Fair market value of machinery ( checked from the price quotation as well as latest transaction price of the seller) is NPR 1,10,000.

In this case the transaction shall be measured at NPR 1,10,000 not at NPR 1,20,000.

Accounting Entry:

Machinery Account Dr NPR 1,00,000

Equity Share Capital Account Cr NPR 1,00,000

Share Premium Account Cr NPR 10,000

ASB-NEPAL 8

Costs of PPE at initial recognition and costs after initial recognition when an entity follows cost model is discussed in Paragraphs7 and 9 of this Guidance. 4. Initial Recognition Two conditions are satisfied for recognition of PPE -

(i) it is probable that future economic benefits associated with the asset will flow to the entity; and

(ii) the cost of the asset can be reliably measured.

Economic benefits to be derived from an item of PPE can be direct or indirect. An item of PPEmay generate economic benefit individually or in association with other assets and liabilities.

An item of PPE like safety and environmental equipment does not generate any direct economic benefit. Still such items are recognised as PPE since they generate economic benefits along with associated assets. For example, a safety equipment creates value enhancement to a chemical processing plant as the plant is not permitted to operate without the safety equipment.

[ Paragraphs 7 & 11, NAS 16]

5.Component-wise recognition of PPE

A complex PPE is segregated by significant parts. Accordingly, at the time of initial recognition costs are allocated to various components. An entity may adopt the following policy for componentisation of PPE :

(i) a component is separately identifiable and measurable, and can be separated from the complex asset;

(ii) the useful life of component is shorter than that of the main asset such that it requires replacement during the life of the complex asset to which it belongs;

(iii) the cost of the component exceeds the capitalisation threshold of the entity;

(iv) the cost of the component is significant in relation to the total cost of the complex asset; and

(v) the useful life of the component is different from the complex asset such that failure to depreciate the component will create material difference in depreciation charge.

When any of those components is replaced, carrying amount of the replaced component (i.e. old component) is derecognised and new component is recognised. For this purpose each of the significant components is accounted like an independent asset. Each such significant component is depreciated separately. [ refer to Paragraph 44, NAS 16]

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For the purpose of NAS 16.44, level of significance may be set at 10% of total cost or less. Any entity decides its capitalization threshold in absolute amount commensurate to the size of its total assets. Often an item of asset costing less than NPR 10,000 is written off as expense in the year of purchase even if that has useful life more than one year. NAS 16.13requires major parts are also separately recognized. Significance of parts may be set at the same level as that of a component.In other words, there is no difference between major part (NAS 16.13) and significant part (NAS 16.44) . Major spare parts and stand-by equipment qualify as property, plant and equipment when an entity expects to use them during more than one period. Similarly, if the spare parts and servicing equipment can be used only in connection with an item of property, plant and equipment, they are accounted for as property, plant and equipment [Paragraph 8,NAS 16]. Accordingly, on replacement of major parts and stand-by equipment the carrying amount shall be derecognised and cost of new item shall be recognised. Example 2[ Components and parts] A complex asset is comprising of many major and small parts. Its cost excluding directly attributable costs is NPR 1,00,000. One of its part costs NPR 12,000 and another NPR 18,000. All other parts cost less than NPR 10,000. Estimated useful life of the main asset and two parts are as follows: Main Asset 30 years ;Part 1 10 years; Part 2 30 years. In this case, the company shall componentise in the following manner :

Complex Asset

Cost NPR 1,00,000

Useful Life 30 years, Scrap 5%

Main Asset

Part 2 & Other parts

Cost NPR 1,00,000

Useful Life 30 years, Scrap 5%

Component 1( Part 1)

Cost NPR 10,000

Useful Life 10 years, Scrap 5%

Major Part 2

Cost NPR 12,000

Useful Life 30 years, Scrap 5%

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Figure 1 : Components and parts of a complex asset As displayed in the Figure 1 above, the first level classification is componentization as per NAS 16.44. The main asset and its components are depreciated separately. A major part is not depreciated separately but a sub-account is maintained for replacement purposes.

Table 1Treatment of spare parts and stand -by equipment

Type of spares parts Accounting Treatment

1. Major spares and stand by equipments which are expected to used for period over more than one accounting periods

To be recognised as property , plant and equipment and depreciated over their useful lives.

2. Spares parts and servicing equipment which can be used only in connection with a particular item of property , plant and equipment ( i.e. non-inter changeable items)

To be recognised as property , plant and equipment and depreciated over the periods not exceeding the remaining useful life of the related asset.

3. Other items of spare parts and servicing equipment

Expense on use

Unused items form part of inventory.

5.1 Treating components of PPE as assets rather than inventories

PPEs are recognised component-wise. This means each significant part is treated just like an asset. When that part is replaced , it is derecognised and new part is capitalised.

Therefore, the stock of such significant parts are not classified as inventories. They are just like capital work in progress. The stock of significant parts awaiting utilisation may be classified as Stock of Capital spares. NAS 2 Inventoriesdoes not apply to capital spares.

5.2 Repairs and maintenance

Normally spare parts and servicing equipment are accounted for as an item of inventory and expensed when used. Day to day maintenance expenses are expensed as repairs and maintenance. This type of costs include labour, consumables and small parts.

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In case spares parts and servicing equipment can be used only in connection with a particular item of PPE ( i.e. non-inter changeable), they are accounted for as property, plant and equipment but should not be depreciated over a period which extends beyond the remaining useful life of the main asset to which the part relates.

NAS 2 Inventories applies to stcok of maintenance spares and consumables.

5.3 Inspection costs

Certain assets require regular inspection as preventive measures whether any parts to be replaced or not. An example is aircraft inspection or dry–docking of ship. NAS 16.14 sets out that when each major inspection is performed, its cost is recognised in the carrying amount of the item of property, plant and equipment if the recognition criteria are satisfied. Any remaining carrying amount of the previous inspection ( distinct from the physical asset) is expensed.

In other words, inspection cost shall be accounted for as a separate component and depreciated over its useful life. The useful life of inspection cost is the time between two inspections.

6. Measurement principle

At initial recognition , an item of PPE is measured at cost. In subsequent measurement, the item of PPE is measured applying cost model or revaluation model. It is possible to apply cost model or revaluation model to different classes of PPE . Examples of separate classes of property , plant and equipment are – (i) land, (ii) land and buildings, (iii) machinery, (iv) ships, (v) air craft, (vi) motor vehicles, ( vii) furniture and fixtures, and (viii) office equipment.

However, it is not possible to apply cost model to one item whereas revaluation model to another item within the same class. Selection of cost or revaluation model is by class of PPE not by items. NAS 16.36 states that -

‘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.’

This implies that selective revaluation of an item of PPE within a class is not possible. So selective application of cost model or revaluation model to a particular item of PPE belonging to a particular PPE class is not possible.

If cost model is applied in subsequent measurement, the PPE is carried at cost less accumulated depreciation and accumulated impairment loss.

If revaluation model is applied in subsequent measurement, the PPE is carried at fair value less subsequent accumulated depreciation and subsequent impairment loss. Normally , fair value of the asset is determined at the end of the reporting period. In case the fair value is determined on any other date, depreciation for the balance of the reporting period shall be charged on revalued amount.

ASB-NEPAL 12

7. Details of cost

Cost of an item of property , plant and equipment comprises of –

(a) purchase price net of discounts and rebates, including import duties and non- refundable purchase taxes,

(b) directly attributable costs of bringing the asset to working condition and

(c) the initial estimate of the costs of dismantling and removing the item and restoring the site.

Subsequent re-estimation of dismantling expenses may result in increase or decrease of provision. Such change is also capitalised. Refer to Examples 3 & 7.

Directly attributable costs include – (i) employee benefit costs , (ii) site preparation cost, (iii) initial delivery and handling costs, (iv) installation and assembly costs, (v) cost of testing net of sale proceeds of any goods produced in the testing process, and (vi) professional fees .

Indirect expenses are not capitalised. Borrowing costs are capitalised in accordance with NAS 23 Borrowing Costs. However, no incidental income and expenses are adjusted to costs which arise from activities which are for brining the bringing the asset to working condition. For example income from letting out the project site for an exhibition is not deducted from the cost of the project.

The following items of cost are not included in the cost of property, plant and equipment:

(i) costs of opening a new facility; (ii) cost of introducing new product or service, i.e. promotional costs of the

produce not of the asset ; (iii) costs of conducting business in a new location or with a new class of

customer (iv) administrative and other general overheads; and (v) Staff training costs.

When an item of property, plant and equipment is acquired and payment is deferred beyond normal credit terms , the difference between total payments made and cash price equivalent is recognized as interest expense. Such interest can be capitalized to the extent permissible as per NAS 23 i.e. during the construction period.

The cost of any self – constructed asset is derived by eliminating any internal profit . Also costs of any abnormal loss of material, labour and other resources incurred are not included in the cost of the asset. Cost of any asset held under finance lease is determined applying NAS 1. The carrying amount of an asset can be reduced by the amount of any government grant in accordance with NAS 20. [Paragraph 28, NAS 16] .

ASB-NEPAL 13

Example 3[Purchase price of PPE] Entity K purchased an plant for a gross price NPR 200 million . The seller granted 0.5% rebate . The gross price includes excise duty NPR 18 million for which the buyer entity will get tax refund and non-refundable VAT of Rs. 10 million. It has also incurred NPR 15 million for transportation costs , handling charges and insurance , NPR 5 million for installation and NPR 3 million for testing and professional fees. It has earned NPR 0.2 million from selling goods produced out of testing. The company borrowed NPR 100 million for financing the new purchase @ 10%. The entire process of purchase to make the operational took nearly 15 months. The company earned NPR 0.1 million from short –term parking of the money borrowed pending payment to supplier and meeting all costs.

What should be the initial cost of the plant ?

The asset is componentised into main , part 1 and part 2. What procedure should be in place for componentisation ?

Solution

Cost Items Amount in NPR Million

Purchase price

Less Rebate

Less Refundable taxes

Transportation , handling and insurance

Installation charges

Testing and professional charges

Less sale proceeds goods produced in the testing process

Borrowing cost capitalized*

Less Earning from short term parking of the borrowed fund pending utilisation

200.0

1.0

18.0

----------

3.0

0.2

---------

12.5

0.1

---------

181.0

15.0

5.0

2.8

12.4

-----------

ASB-NEPAL 14

Initial cost

216.2

-----------

* Borrowing costs are to be computed applying amortised cost method. As per NAS 23 Borrowing Costs, borrowing costs are capitalised during construction costs – refer to Paragraphs10-15 of NAS 23.

Suppose that stand-alone purchase prices Component 1 & Companent 2 are NPR 20 million and NPR 25 million respectively. The entity shall first allocate NPR 181 million among Main Assets and Components, and then allocate the balance of the costs in proportion thereof:

Cost Allocation

NPR in Million

Main Asset Component 1 Component 2 Total

Allocation of net purchase price

136.00 20.00 25.00 181.00

Other expenses 26.45 3.89 4.86 35.20

Break-up of carrying amount

162.45 23.89 29.86 216.20

Given below is in Table 2 a checklist of items to be included in the cost of a PPE and items of cost to be excluded.

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Table 2 Checklist of costs to be included and excluded

Initial costs

Items to be included Items to be Excluded

(a) Purchase price net of discounts and rebates, including import duties and non- refundable purchase taxes,

(b) directly attributable costs of bringing the asset to working condition and

(c ) the initial estimate of the costs of dismantling and removing the item and restoring the site .

Break-up of directly attributable costs:

(i) employee benefit costs ,

(ii) site preparation cost,

(iii) initial delivery and handling costs,

(iv) installation and assembly costs,

(v) cost of testing net of sale proceeds of any goods produced in the testing process, and

(vi) professional fees .

i. Costs of opening a new facility;

ii. cost of introducing new product or service, i.e. promotional costs of the produce not of the asset ;

iii. costs of conducting business in a new location or with a new class of customer;

iv. administrative and other general overheads; and

v. staff training costs.

Also exclude interest expense included in defer payment

No costs are added to the carrying amount after the assets becomes operational in its location as intended by the management :

i. initial operating losses

ii. dislocation expenses

Special points for determining cost of self-constructed assets :

Include cost of materials, labour , and directly attributable overheads

Exclude : Abnormal wastage and internal profit

Include : Borrowing costs in accordance with NAS 23 if the self-constructed is a qualifying asset under that standard

Include : Present value of estimated site restoration costs.

Special point for measurement of cost of assets under finance lease :

ASB-NEPAL 16

Cost of any asset held under finance lease is determined applying NAS 17Leases.

Special point for measurement of cost of assets for which there is government grant :

The carrying amount of an asset can be reduced by the amount of any government grant in accordance with NAS 20Accounting for Government Grants and Disclsoure of Government Assitance.

7.1 Cost of self-constructed asset

NAS 16.22sets out the core principle for determining the cost of a self-constructed asset:

The cost of a self-constructed asset is determined using the same principles as applicable to an purchased asset. If an entity makes similar assets for sale in the normal course of business, the cost of the asset is usually the same as the cost of constructing an asset for sale. Any internal profits are eliminated in arriving at such costs. Similarly, the 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.

Elements of cost for a purchased asset and self-constructed asset are the same. For internally generated input , no profit is included.

Example 4 [Cost of self-constructed asset]

Entity E incurred the following expenses on account of construction of its office building :

Material purchased NPR 10 million

Labour NPR 5 million

Other expenses NPR 2 million

Advance to material suppliers NPR 2 million

Material on hand NPR 1 million

Loans taken for construction NPR 10 million @ 14%. Loan to date 12 months.

Book the above-mentioned expenses in appropriate asset-head.

ASB-NEPAL 17

Solution

( NPR in Million)

Cost items Capital Work in Progress

Loans and Advances

Total

Material

Labour

Other Expenses

Capitalisation of Borrowing costs

Advance to material suppliers

9.00

5.00

2.00

1.40

2.00

17.40 2.00 19.40

Unused materials 1.00

18.40 2.00 20.40

Commencement date of self-construction of an asset is critical as that signifies the commencement of capitalisation of expenses incurred for the self-constructed asset. Costs incurred prior to that shall be expensed.

Example 5 [ Commencement of capitalisation of expenses relating to self-constructed assets] The Board of X Ltd. discussed on 1 January 2012 based on a note prepared by the project team to construct a plant for manufacturing certain chemicals. This Note was prepared based on a discussion in an earlier Board meeting in which the Board wished that the Project Department should put forth some expansion proposals. Accordingly, it has asked the Project Department to carry out preliminary survey about the feasibility of the proposal which should be the basis for further discussion.

Based on the preliminary survey ( report dated 30 June 2012) , the Board subsequently decided to go ahead with a full fledged Feasibility Study and appointed a consultancy firm to carry out market survey as well. The scope of feasibility report included the selection of location.

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The Feasibility Report was satisfactory ( report date 30 September 2012) . The Board decided ( meeting date 31 October 2012) to go ahead with the project but there was no unanimity as regards project location. Another team was appointed to decide upon the location. Location was decided in another Board meeting dated 31 January 2013. The company then took necessary step to complete the formalities relating to project development in the earmarked location and construction work started on due course.

Expenses incurred for various activities are as follows ( Amoint in NPR):

Total Allocated Overhead

Expenses for preliminary survey 12,00,000 2,40,000

Expenses for Feasibility Report 9,20,500 4,00,000

Expenses for site selection 3,50,000 1,20,000

Expenses for preliminary survey ,feasibility report, site selection include allocated overhead costs of the project department.

Allocated overhead represents office expenses and depreciation.

(a) Shall these expenses be capitalised in accordance with NAS 16 ? If not, what shall be the point of commencement of capitalisation ?

(b) Which of the above-stated expenses can be capitalised ? Is it permissible to capitalise allocated overhead?

(c ) Can the company capitalise allocated overhead on the basis of normal capacity of the project department? It may appear that indirect cost of the Project Department will unnecessarily inflate the project cost and thus the cost of various assets under construction. The company has recorded cost of project excluding overhead of project department.

Analysis

This case shall be addressed with reference to recognition principle set out in NAS 16.7:

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

(a) it is probable that future economic benefits associated with the item will flow to the entity; and

(b) the cost of the item can be measured reliably.”

ASB-NEPAL 19

In the given case, cost of all items could be reliably measured. But the point of time since when ‘it is probable that future economic benefits associated with the item will flow to the entity’ becomes critical for the purpose of capitalization of expenses.

All project ideas are not translated into a successful project. Rejection rate may be pretty high. So commencement of developing initial project ideas through preliminary survey or feasibility report does not signify the point of time when it becomes ‘probable that future economic benefits associated with the item will flow to the entity’.

The probability can be significant when the Board approves the project report and decided to implement the project. In case the site selection is post –project approval process then related expenses can be capitalized.

Allocation of overhead of the Project Department :Administration and other general overhead costs are not included in the cost of asset. A portion of the overhead may be directly linked to the project. Other portion are office expenses by nature like expenses for electricity and facilities, depreciation of office equipment. Such indirect expenses are not allocated to project (s).

Expenses Capitalised ( NPR):

Total Allocated Capitalised

Overhead Cost

Expenses for site selection 3,50,000 1,20,000 2,30,000

Directly attributable costs are capitalised to Asset Under Construction but administrative and general overheads shall be excluded. However, project office expenses are diretly attributable expenses but it is linked to capacity of the project office. If the capacity of the project office remains under-utilised, then full allocation of cost would result in overloading the asset. Therefore, it is appropriate to allocate project office expenses on normal capacity basis.

Incidental Income and Expenses - An entity may carry out certain incidental operations which are linked to construction of assets but not necessary to ‘bring the item to the location and condition necessary for it to be capable of operating in the manner intended by management’. These incidental operations , of course, give rise to expense and income. For example, income may be earned through using a building site as a car park until construction starts.

These incidental operations may occur before or during the construction or development activities.

Because incidental operations are not necessary to bring an item of asset ‘to the location and condition necessary for it to be capable of operating in the manner

ASB-NEPAL 20

intended by management’ , the income and related expenses of incidental operations are recognised in profit or loss and included in their respective classifications of income and expense.

7.2Interest on defer payment

The cash price equivalent at the recognition date is the cost of PPE. However, in case of delayed payment that is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognised as interest over the period of credit . Of course, such interest or a relevant part of such interest can be capitalised in accordance with NAS 23. [ Paragraph 23, NAS 16]

Example 6 [ Defer payment ] Entity E purchased an plant for NPR 50,00,000. As per the purchase agreement , there is 50% down payment and balance will be paid in two annual equal instalments. The seller loaded interest @ 14% p.a.

What is the cost of plant at initial recognition ?

Solution

When the payment is extended beyond credit terms , cost of the asset is computed eliminating the interest element. The cash payment shall be discounted applying a discount rate that reflects underlyimg interest rate i.e.14%p.a. to convert instalment price into cash equivalent price.

( Amount in NPR)

Year Cash flow Discount rate

Discount Cash Flow

0 2500000 1.0000 2500000

1 1250000 0.8772 1096491

2 1250000 0.7695 961834

Cost of the asset 4558326

7.3Capitalisation of decommissioning expenses

NAS 16 Property , Plant and Equipmentrequires capitalization of expenses for decommissioning , site restoration and similar liabilities. Paragraph 16 (c) of NAS 16 is of critical significance . The cost of an item of PPE inter alia comprises of

“ The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when

ASB-NEPAL 21

the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.”

Therefore, an entity shall estimate expenses for decommissioning, site restoration etc. at the time of initial recognition. Of course, expenses of decommissioning , removal of wastes and site restoration that relates to production of inventories are inventorised (i.e. included in the cost of production).

Decommissioning expenses are capitalized in cases of mining ,oil exploration, nuclear plant, hydro-electricity plant, etc. where there are liability for site restoration.

Decommissioning expenses are estimated based on current expenses of decommissioning and inflated to the time of decommissioning as per the estimated useful life of the asset. Expenses are projected applying average inflation rate at the time of estimation. Then the projected expenses are discounted to its present value applying current risk –free rate. Current risk free rate shall be government bond rate for a period that matches with the useful life of the asset.

Unwinding of discount is treated as interest expense and charged to the Statement of Income.

Example 7Hydro-electricity Ltd. has estimated current site restoration expenses at NPR 5,00,000. Estimated rate of inflation is 9% and risk-free rate is 11%. The estimated useful life of the project is 40 years. As on 1.1.2013, the date of initial recpgnition, the company estimates that NPR5,00,000 as the current cost of site restoration.

(a) How would the company apply the requirement of Paragraph 16( c) of NAS 16 ?

(b) Show unwinding of discount.

Solution

Selection of discount factor for 40 years is a critical issue. There is no 40- year Government Bond available. Therefore, 40-year risk free rate is extrapolated based on available risk free rate.

NPR

Projected site restoration expenses (1+9%)40×5,00,000 157,04,710

Present value of estimated site restoration expenses

157,04,710 ----------------

(1+11%)40

2,41,608

Journal Entry at initial recognition of PPE as on 1 January 2013 :

PPE Dr. NPR 2,41,608

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Provision for Decommissioning Expenses Cr.NPR2,41,608

(b) Unwinding of discount ( Amount in NPR)

Year Decommissioning Provision

Unwinding of discount

0 241608

1 268185 26577

2 297685 29500

3 330430 32745

4 366777 36347

5 407123 40346

6 451907 44784

7 501616 49710

8 556794 55178

9 618041 61247

10 686026 67985

11 761489 75463

12 845253 83764

13 938230 92978

14 1041436 103205

15 1155994 114558

16 1283153 127159

17 1424300 141147

18 1580973 156673

19 1754880 173907

20 1947917 193037

21 2162187 214271

22 2400028 237841

23 2664031 264003

24 2957074 293043

25 3282353 325278

26 3643411 361059

27 4044187 400775

28 4489047 444861

29 4982842 493795

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30 5530955 548113

31 6139360 608405

32 6814690 675330

33 7564306 749616

34 8396379 832073

35 9319981 923602

36 10345179 1025198

37 11483149 1137970

38 12746295 1263146

39 14148387 1402092

40 15704710 1556323

8. Exchange of Assets

If an item of PPE is acquired in exchange of an item of non-monetary asset, then the asset acquired is measured at fair value unless the transaction does not have commercial substance. The transaction will have commercial substance if the change in post-tax cash flows is substantially affected by the exchange of the asset.

If the fair value of the PPE acquired by exchange transaction cannot be measured, the asset is recognised at the carrying amount of the asset given up.

9. Measurement after initial recognition

After initial ewcognition, an entity may either choose cost model or revaluation model.The shall detail it out in the accounting policy. This election shall be applied to a class of PPE. [ Paragraph 29, NAS 16]

If cost model is adopted an asset is carried at cost less accumulated depreciation and accumulated impairment. Refer to NAS 36 Impairmentfor the purpos eof imapirment analysis.[ Paragraphs 29-30, NAS 16]

Subsequent costs-Subsequent costs are those which are incurred after the initial costs. These are costs incurred while the asset is already in operation.

The basic principle is that subsequent costs are added to the carrying amount of PPE only when it is probable that future economic benefits, in excess of originally assessed standard of performance of the existing asset, will flow to the entity. All other subsequent expenses are expensed in the period in which they are incurred.

Examples of subsequent costs that can be added to the carrying amount are –

(i)modification of an item to extend its useful life or increase in capacity;

ASB-NEPAL 24

(ii) upgrading machines parts to achieve a substantial improvement in the quality of output;

(iii) adoption of new production process enabling a substantial reduction in previously assessed operating costs.

Expenditure on repairs and maintenance is made to restore or maintain the future economic benefit that an entity can expect from the originally assessed standard of performance of the asset. So such expenditure item is expensed in the period in which it is incurred.

9.1Application of revaluation model

The revaluation model can be applied to such items of PPE the fair value of which can be reliably measured. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Refer to NFRS 13 for fair value measurement.

When an item of property , plant and equipment is revalued , the entire class of the asset should be revalued. Examples of separate classes of property , plant and equipment are – (i) land, (ii) land and buildings, (iii) machinery, (iv) ships, (v) air craft, (vi) motor vehicles, ( vii) furniture and fixtures, and (viii) office equipment. However, rolling basis revaluation is permissible for a class of assets but it should be completed within a short period and revaluations are to be kept up to date.

Fair value of an item of PPE is not necessarily the market price. Fair value of land and building is determined on the basis of market based evidence which is termed as appraisal method. It is preferred that the measurement of the fair value of land and building is undertaken by professional valuers. Whereas the fair value of plant and equipment is carried out applying income approach or depreciated replacement cost approach. Both the approaches are discussed in Application Guidance to NFRS 13.

Revaluations are carried at fair value of the assets. Refer to the Table 3 below to understand what constitutes fair value of a particular item of property , plant and equipment.

Table 3 Fair Value Measurement of Property , Plant and Equipment

Types of assets Fair value

1. Land and Buildings Market value. Appraisal is normally carried by qualified valuer.

2. Plant and machinery for which market value exist

Market value.

3. Plant and machinery for which market value is not available because of specialized nature of the assets

Income approach : Times of Earning Before Interest , Tax , Depreciation and Amortisation

Depreciated replacement cost

ASB-NEPAL 25

Frequency of revaluation depends upon volatility in the fair value of the assets. A asset that experiences highly volatile movements in fair value requires annual revaluations while other assets may be revalued in an interval of every three to five years.

Increase in the carrying amount of the property , plant and equipment should be recognized in the comprehensive income and accumulated in equity under a heading ‘revaluation surplus’ . If the entity has previously charged any revaluation loss ( on the same asset) to the Income Statement , to that extent revaluation surplus can be credited to the Income Statement.

On the other hand, if there is decrease in the carrying amount of an asset out of revaluation , the revaluation loss is charged to the Income Statement. If there exists any revaluation surplus ( on the same asset) , the revaluation of loss can be charged to such revaluation surplus to the extent possible.

Table 4 Accounting for revaluation gain or Loss [ SeeNAS16.39-41]

1. Increase in the carrying amount arising out of revaluation

Credit the increase to Statement of Comprehensive Income and to equity under the head revaluation surplus.

2.Can any portion of revaluation surplus be treated as income ?

Yes . To the extent such increase reverses previously accounted for decrease of the same asset.

3. Decrease in the carrying amount arising out of revaluation

Charge to income statements as expense.

5. Can any portion of revaluation loss be adjusted against revaluation surplus?

Yes. To the extent there exists revaluation surplus for the same asset.

How to adjust accumulated depreciation when the asset is revalued? [NAS 16.35]

When the asset is restated by means of an index to its depreciated replacement cost

Restate the accumulated depreciation proportionately with change in gross carrying amount.

By this carrying amount of asset after revaluation equals its revalued amount.

When the asset is revalued to its market value

Eliminate accumulated depreciation against gross carrying amount of the asset.

Then revalue the net carrying amount .

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Example 8 [ Revaluation and Deferred Tax]

X Ltd. revalued plant and machinery Original Cost NPR 100 million , Accumulated Depreciation NPR 40 Million

Accumulated Depreciation as per Income Tax NPR 70 million i.e. carrying amount of the asset as per income tax records is NPR 30 million.

Suppose that applicable tax rate is 30%. So there shall be deferred tax liability of NPR 21 million.

The asset is revalued by NPR 20 million. Therefore, as per NAS 12. Additional deferred tax liability shall be recognised at NPR 6 million. This additional deferred tax liability shall be adjusted against income tax over the remaining useful life of the asset because the revaluation is expected to increase the future revenue genrating capacity resulting in additional income and income tax.

Accounting Entries for revaluation of asset ( amount in NPR Million):

Prperty, Plant and Equipment Dr. 20

Revaluation Reserve Cr. 14

Deferred Tax Liability Cr. 6

10. Depreciation Depreciation is the systematic allocation of thedepreciable amount of an asset over its useful life.Depreciation method to be applied for an item of PPE is adopted such that depreciable amount is allocated on a systematic basis over the useful life of the asset. The underlying principle is that over-recovery or under-recovery of the depreciable amount shall be avoided.

NAS 16 has therefore requires the following :

(i) Charge depreciation component-wise (ii) Annual review of the useful life and residual value of the asset (iii) Annual review of the depreciation method.

Changes in depreciation method , useful life and residual value are considered as change in accounting estimate. Depreciation method shall be consistently pursued from period to period. Depreciation method is changed when there is change in expected pattern of consumption of future economic benefits embodied in an item of PPE.

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Depreciation methods specified in NAS 16 are straight line method, reducing balance method and unit of production method. Usually unit of production method is found suitable for mining and mineral extraction activities. Of course , it is possible to apply this method to any plant and machinery for which it is possible to determine the useful life based on the production hours or production capacity in terms of number of units.

10.1 Residual value The residual value of an asset is the estimatedamount that an entity would currently obtain from disposal of the asset,after deducting the estimated costs of disposal, if the asset were alreadyof the age and in the condition expected at the end of its useful life. Normally residual value of an asset is not more than 5%. In case it exceeds 5%, the fact shall be disclosed giving basis of such estimation. In practice, the residual value of an asset is often insignificant and therefore immaterial in the calculation of the depreciable amount.

The residual value and the useful life of an asset is 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 NAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

In the case the residual value of the asset is increased and becomes greater than the carrying amount of the asset, then depreciation charge also becomes zero.

There will be no depreciation charge until the residual value decreases below the carrying amount.

10.2 Useful life In Appendix I indicative useful life of certain assets are provided. The useful life of an asset shall not normally be differentfrom the useful life shall not be different from that as indicatedin Appendix I. In case an entity uses a useful life which isdifferent from the useful life indicated in theAppendix , it shall disclose thejustification for the same. In case indicative useful life of an asset is not given in Appendix I, the entity shall estimate the useful life. Also an entity shall estimate useful life of components of an asset for charging depreciation separately.

The useful life of an asset is defined in terms of the asset’s expected utility to the entity. Depreciation method used should reflect the pattern of the asset’s economic benefit consumed by the entity. While determining the useful life of an asset the following factors should be taken into consideration -

ASB-NEPAL 28

(i) expected usage by the entity;

(ii) expected physical wear and tear;

(iii) technical obsolescence;

(iv) legal or similar limits on the use of the asset.

The useful life of asset shall be periodically reviewed. In case expectation about the useful life is changed, it is considered as change in accounting estimate and accounted for prospectively as per NAS 8.

• Can the useful life of an asset be shorter than its economic life? Yes. Sometimes the management policy may be to use an asset for specified period which is shorter than its economic life.

10.3 Commencement and cessation of depreciation

Depreciation of an asset begins when it is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. When significant parts ( which are recognised as PPE) are purchased , it is not presumed that depreciation begins immediately. Those parts are not ‘available for use’ until fitted in the plant, machinery or equipment. That is the significance of the phrase ‘location and condition necessary for it to be capable of operating in the manner intended by the management’.

Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with NFRS 5 Non –current Assets Held for sale and Discontinued Operationsand the date that the asset is derecognised.

Depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully depreciated. However, under usage method of depreciation the depreciation charge can be zero while there is no production.

Example9 Componentisation and Depreciation

X Ltd. purchased a plant for NPR 1000 million . The plant became operational on 1.4.2007. The company had componentised the plant as – Main 80% of the cost and Component 1 20% of the cost as per the following details:

Main Component 1 Total

Initial cost ( NPR in Million) 800 200 1000

Useful life ( In Years) 30 10

Residual value ( % of initial cost) 5% 5%

Component 1 is replaced by a new component at the end of useful life of 5 years

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by a new component costing NPR 250 having useful life 8 years.

Solution

( Amount in NPR Million)

Main Component1 Total Initial cost 800.00 200.00 1000.00 Year 1 Depreciation 25.33 38.00 63.33 Balance 774.67 162.00 936.67 Year 2 Depreciation 25.33 38.00 63.33 Balance 749.33 124.00 873.33 Year 3 Depreciation 25.33 38.00 63.33 Balance 724.00 86.00 810.00 Year 4 Depreciation 25.33 38.00 63.33 Balance 698.67 48.00 746.67 Year 5 Depreciation 25.33 38.00 63.33 Balance 673.33 10.00 683.33 Year 6 Derecognise on replacement 0 -10 -10 Recognise replaced component

0 250 250

673.33 250.00 923.33 Depreciation 25.33 28.125 53.46 Balance 648.00 221.88 869.88

10.4 Principles of Depreciation Charge

Important principles relating to depreciation charge are -

i. Depreciation charge begins when the asset is available for use, i.e., when it is in the location and condition necessary for it to be capable of operating in the manner intended by management.

ii. Depreciation charged separately for each significant part of the asset.

iii. Depreciation charge ends when the asset is classified as held for sale under IFRS 5 or derecognized.

ASB-NEPAL 30

iv. Depreciation is charged even if the fair value of the asset is more than the depreciable amount.

v. Repair and maintenance charge does not negate the requirement of depreciation charge.

vi. If the residual amount of the asset exceeds the carrying amount , there should be no depreciation charge as by definition depreciable amount becomes negative. Depreciation charge will resume when the residual amount becomes less than the carrying amount.

vii. Three method of depreciation are set out in IAS 16 – straight line method, reducing balance method and production unit method.

viii. Depreciation does not cease when the asset remain idle or retired from active use unless the depreciable amount is zero.

ix. Depreciation method is reviewed at least at each financial year. If there is change in consumption pattern of the expected future economic benefits, depreciation method can be changed. Such a change in depreciation method is regarded as change in accounting estimate.

• Can an entity charge depreciation applying regulatory rate which is higher or lower than the depreciation rate arrived at applying management estimate of useful life of the asset and residual value.

No. NAS 16 does not permit higher or lower depreciation than the depreciation charge arrived at applying management estimate of useful life of the asset and residual value.

Land and Building -Land and buildings are separable assets and are accounted for separately, even when they are acquired together. Therefore, at initial recognition land and building shall measured and recognised separately.

With some exceptions, such as quarries and sites used for landfill, land has an unlimited useful life and therefore is not depreciated.

Buildings have a limited useful life and therefore are depreciable assets. There may be increase or decrease in the value of land on which a building stands , this does not affect the determination of the depreciable amount of the building. Depreciation of building is independently determined on the basis of its cost, useful life, and residual value.

11. Derecognition of PPE

An item of property , plant and equipment is de-recognised , i.e., eliminated from the Statement of Financial Position ( i.e. Balance Sheet) on disposal or when no further economic benefit is expected to be derived from such asset [NAS 16.67]. Disposal of PPE is done by sale, by donation or by entering into a lease agreement which is classified as financial lease under NAS 17.

Gains or losses arising on derecognition of an asset is recognized in the profit or loss when a particular asset is derecognized. Gains or losses on disposal of an asset should

ASB-NEPAL 31

be calculated with reference to the carrying amount [ NAS 16.55-56]. However, this derecognition gain is not classified as revenue under IAS 18. It is an item of non-operating gain / loss.

There is an exception to the principle of recognition of gain or loss on derecognition of asset stated above in case of sale and leaseback transaction under NAS 17.

For applying asset derecognition principle cross-reference is made to the criteria set out in IAS 18 in case of sale of goods . Conditions stated for sale of goods shall be satisfied for recognising de-recognition of PPE as well. If the consideration receivable on disposal of item of PPE, then interest element is segregated.

Example 10[ Deferred receivables arising out of derecongition of PPE]WDV of an item of PPE is NPR 10,00,000. The asset is sold for Rs. 12,00,000 during 2013. However, the buyer will the sale proceeds after one year. The company shall de-recognise the asset and recognise receivables at discounted value of NPR 10,00,000. How should it be accounted for as per NAS 16?

Take one year borrowing rate of the buyer for discounting. Assume that it is 10%.

Solution : As per NAS 16.72 receivables shall be discounted and interest element shall be segregated:

NAS Accounting on derecognition in 2013 ( amount in NPR) :

Receivables Dr 9,09,090

Fair value loss Dr 90,910

PPE Cr10,00,000

An item of PPE is derecognised when it is –

(i) Disposed of or (ii) No further economic benefit is expected out of usage , i.e. abandoned or

scrapped. Disposal of an asset can take place by sale , by donation or by entering into finance lease. When an asset is given on finance lease , it is derecognised and a finance lease receivable is recognised in accordance with NAS 17.

When an asset is scrapped, it is removed from the PPE category into classified separately if there is any realisable value. Scrapped asset is classified into current asset in accordance with NAS if the scrap sale is expected to take place within 12 months from the reporting date. Otherwise it is classifies as non-current. Scrapped asset is measured at net realisable value which is entity-specific valuation.

Scrapped or abandoned assets are distinguished from non-current assets held for sale as defined in NFRS 5 . Refer to Paragraphs 13 and 14 of NFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

ASB-NEPAL 32

Assets which are temporarily taken out of operation are not classified as asset abandoned.

11.1 Gain or loss arising from derecognition of PPE

Gain or loss on derecognition of PPE is not included in revenue but presented as a separate line item in accordance with Paragraph 82(aa) of NAS 1 Presentation of Financial Statements.

Gain or loss arising from derecognition of an item of PPE is recognised in the Statement of Income. Such gain is treated as other income.

12. Compensation for impairment loss

Impairment loss on asset is measured in accordance with NAS 36. Accumulated impairment loss is deducted from the carrying amount of the asset. Compensation of impairment loss received from a third party is not an offset against the impairment loss. It is accounted for separately.

13. Restored PPE

If an item of PPE gets damaged and taken off from operation it is derecognised. Its restoration is a separate event. It is to be recognised as PPE again if the recognition criteria given in NAS 16.7 is satisfied.

When a damaged component or major part is replaced by a new component/ major part, the old one is derecognised and the new one is recognised.

14. Disclosures

NAS 16.73-79 set out disclosure norms.

Paragraph reference to

NAS 16

Disclosure Requirements

73 1. measurement bases used in determining gross carrying amount;

2. depreciation methods used;

3. useful life of the asset or depreciation rate;

4. the gross carrying amount , and the accumulated depreciation and accumulated impairment losses at the beginning and end of the

ASB-NEPAL 33

period;

5. Reconciliation of the carrying amount at the beginning and end of the period:

Opening balance

+ Additions during the year

- Classified as held for sale under IFRS 5 and other disposals

+ Acquisitions under Business Combinations

± Revaluation gain / loss

± Impairment loss or reversal of impairment loss

- Depreciation

± Exchange difference arising from currency translation

± Other changes

= Closing Balance

74 a. restriction on title , if any

b. whether the asset is pledged

c. amount of expenditure recognized in the carrying amount of an asset which is under construction stage

d. amount of contractual commitment for acquisition of property , plant and equipment

e. amount of third party compensation with respect to impairment loss.

75 a. whether depreciation is charged to profit or loss , or included in another asset

b. accumulated depreciation at the end of the period. 76 NAS 8 disclosures in case of change in estimates :

For change in residual value

For change in useful life of the asset

For change in estimated decommissioning costs

NAS 8 disclosures in case of change in accounting policy:

ASB-NEPAL 34

Switching over from cost model to revaluation model

77 Additional disclosures when property, plant and equipment is carried at revalued amount :

a. date of revaluation

b. involvement of the independent valuer , if any

c. significant assumptions in estimation of fair value

d. Proportion of fair value derived from observable market price in arm’s length transaction and Proportion of fair value derived through valuation techniques

e. Carrying amount under cost model for each class of property, plant and equipment carried at revalued amount

f. Revaluation surplus and change in the revaluation surplus during the accounting period

Restriction , if any , on distribution of revaluation surplus to the shareholders.

78 Additional disclosure on impairment in accordance with NAS 36,

79 a. carrying amount of idle property ,plant and equipment

b. gross carrying amount of fully depreciated property , plant and equipment which is still in use

c. carrying amount of retired property ,plant and equipment which are not classified as held for sale under NFRS 5

d. if property ,plant and equipment is carried under cost model , the revalued amount if that is significantly different.

ASB-NEPAL 35

Appendix I

Guidance to Determination of Useful Life of Assets

The useful life of an asset shall not normally be differentfrom the useful life and the residual value shall not be different from that as indicatedin this Appendix, In case an entity uses a useful life or residual value which isdifferent from the useful life or residual value indicated in this Appendix , it shall disclose thejustification for the same. Nature of assets Useful

Life ( Years)

I. Buildings [NESD] (a) Buildings (other than factory buildings) RCC Frame Structure (b) Buildings (other than factory buildings) other than RCC Frame Structure (c) Factory buildings (d) Fences, wells, tube wells (e) Others (including temporary structure, etc.)

60 30

30 5 3

II. Bridges, culverts, bunders, etc. [NESD] 30 Years

30

III. Roads [NESD] (a) Carpeted roads (i) Carpeted Roads-RCC (ii) Carpeted Roads-other than RCC

(b) Non-carpeted roads

10 5

3 IV. Plant and Machinery (i) General rate applicable to plant and machinery not covered under special plant and machinery (a) Plant and Machinery other than continuous process plant not covered under specific industries (b) continuous process plant for which no special rate has been prescribed under (ii) below [NESD] (ii) Special Plant and Machinery (a) Plant and Machinery related to production and exhibition of Motion Picture Films 1. Cinematograph films—Machinery used in the production and exhibition of cinematograph films, recording and reproducing equipments, developing machines, printing machines, editing machines, synchronizers and studio lights except bulbs 2. Projecting equipment for exhibition of films - (b) Plant and Machinery used in glass manufacturing 1. Plant and Machinery except direct fire glass melting furnaces — Recuperative and regenerative glass melting furnaces 2. Plant and Machinery except direct fire glass melting furnaces — Moulds [NESD] 3. Float Glass Melting Furnaces [NESD]

15

8

13 13

13

8 10

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(c) Plant and Machinery used in mines and quarries—Portable underground machinery and earth moving machinery used in open cast mining [NESD] (d) Plant and Machinery used in Telecommunications [NESD] 1. Towers 2. Telecom transceivers, switching centres, transmission and other network equipment 3. Telecom—Ducts, Cables and optical fibre 4. Satellites (e) Plant and Machinery used in exploration, production and refining oil and gas [NESD] 1. Refineries 2. Oil and gas assets (including wells), processing plant and facilities 3. Petrochemical Plant 4. Storage tanks and related equipment 5. Pipelines 6. Drilling Rig 7. Field operations (above ground) Portable boilers, drilling tools, well-head tanks, etc. 8. Loggers (f) Plant and Machinery used in generation, transmission and distributionof power [NESD] 1. Thermal/ Gas/ Combined Cycle Power Generation Plant 2. Hydro Power Generation Plant 3. Nuclear Power Generation Plant 4. Transmission lines, cables and other network assets 5. Wind Power Generation Plant 6. Electric Distribution Plant 7. Gas Storage and Distribution Plant 8. Water Distribution Plant including pipelines (g) Plant and Machinery used in manufacture of steel 1. Sinter Plant 2. Blast Furnace 3. Coke ovens 4. Rolling mill in steel plant 5. Basic oxygen Furnace Converter (h) Plant and Machinery used in manufacture of non-ferrous metals 1. Metal pot line [NESD] 2. Bauxite crushing and grinding section [NESD] 3. Digester Section [NESD] 4. Turbine [NESD] 5. Equipments for Calcination [NESD] 6. Copper Smelter [NESD] 7. Roll Grinder 8. Soaking Pit 9. Annealing Furnace 10. Rolling Mills 11. Equipments for Scalping, Slitting , etc. [NESD] 12. Surface Miner, Ripper Dozer, etc., used in mines 13. Copper refining plant [NESD]

8

18

13 18 18

25 25 25 25 30 30

8 8

40 40 40 40 22 35 30 30

20 20 20 20 25

40 40 40 40 40 40 40 30 30 30 30 25 25

ASB-NEPAL 37

(i) Plant and Machinery used in medical and surgical operations [NESD] 1. Electrical Machinery, X-ray and electrotherapeutic apparatus and accessories thereto, medical, diagnostic equipments, namely, Cat-scan, Ultrasound Machines, ECG Monitors, etc. 2. Other Equipments (j) Plant and Machinery used in manufacture of pharmaceuticals and chemicals [NESD] 1. Reactors 2. Distillation Columns 3. Drying equipments/Centrifuges and Decanters 4. Vessel/storage tanks (k) Plant and Machinery used in civil construction 1. Concreting, Crushing, Piling Equipments and Road Making Equipments 2. Heavy Lift Equipments— Cranes with capacity of more than 100 tons Cranes with capacity of less than 100 tons 3. Transmission line, Tunneling Equipments [NESD] 4. Earth-moving equipments 5. Others including Material Handling /Pipeline/Welding Equipments [NESD] (l) Plant and Machinery used in salt works [NESD]

13 15

20 20 20 20 20

12 20 15 10 9

12 15

V. Furniture and fittings [NESD] (i) General furniture and fittings 10 Years (ii) Furniture and fittings used in hotels, restaurants and boarding houses,schools, colleges and other educational institutions, libraries; welfarecentres; meeting halls, cinema houses; theatres and circuses; andfurniture and fittings let out on hire for use on the occasion of marriagesand similar functions.

10

8 VI. Motor Vehicles [NESD] 1. Motor cycles, scooters and other mopeds 2. Motor buses, motor lorries, motor cars and motor taxies used in a business of running them on hire 3. Motor buses, motor lorries and motor cars other than those used in a business of running them on hire 4. Motor tractors, harvesting combines and heavy vehicles 5. Electrically operated vehicles including battery powered or fuel cell powered vehicles

10

6

8 8

8 VII. Ships [NESD] 1. Ocean-going ships (i) Bulk Carriers and liner vessels 25 Years (ii) Crude tankers, product carriers and easy chemical carriers with or without conventional tank coatings. 20 Years (iii) Chemicals and Acid Carriers: (a) With Stainless steel tanks 25 Years (b) With other tanks 20 Years (iv) Liquified gas carriers 30 Years (v) Conventional large passenger vessels

25

20

25 20 30

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(vi) Coastal service ships of all categories (vii) Offshore supply and support vessels (viii) Catamarans and other high speed passenger for ships or boats (ix) Drill ships (x) Hovercrafts (xi) Fishing vessels with wooden hull (xii) Dredgers, tugs, barges, survey launches and other similar ships used mainly for dredging purposes 2. Vessels ordinarily operating on inland waters— (i) Speed boats (ii) Other vessels

30 30 20 20 25 15 10

14

13 28

VIII. Aircrafts or Helicopters [NESD] 20

IX. Railways sidings, locomotives, rolling stocks, tramways and railways used by concerns, excluding railway concerns [NESD]

15

X. Ropeway structures [NESD] 15

XI. Office equipment [NESD] 5

XII. Computers and data processing units [NESD] (i) Servers and networks (ii) End user devices, such as, desktops, laptops, etc.

6 3

XIII. Laboratory equipment [NESD] (i) General laboratory equipment (ii) Laboratory equipments used in educational institutions

10 5

XIV. Electrical Installations and Equipment [NESD] 10

XV. Hydraulic works, pipelines and sluices [NESD] 15

Abbreviation : NESD = No Extra-shift depreciation Notes 1. "Factory buildings" does not include offices, godowns, staff quarters. 2. Where an accounting period is less than one year, depreciation shall be charged on a pro rata basis. 3. Where, during any accounting period, any addition has been made to any asset, orwhere any asset has been sold, discarded, demolished or destroyed, the depreciation onsuch assets shall be calculated on a pro rata basis from the date of such addition or, as thecase may be, up to the date on which such asset has been sold, discarded, demolished ordestroyed. 3. The following information shall also be disclosed in the accounts, namely:— (i) depreciation methods used; and (ii) the useful lives of the assets for computing depreciation, if they are differentfrom the life specified in the Schedule. 4. Useful life specified above is for whole of the asset. Where costof a component of the asset is significant to total cost of the asset and useful life of that component isdifferent from the useful life of the remaining asset, useful life of that significant component shall bedetermined separately. For the purpose of this standard level of significance may be set at 10% of total cost or less.

ASB-NEPAL 39

5. Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. Ordinarily, the residual value of an asset is often insignificant but it shouldgenerally be not more than 5% of the original cost of the asset. In case residual value is estimated above 5% , the fact shall be disclosed.

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Appendix II

Componentisation of Assets

Examples of components of assets

Given below examples of components of (1) Gas Turbine Package Plant and (2) Switchyard and (3) Building.

Example 1 : Components of Gas Turbine Package Plant

(1) Compressor and turbine with fuel and combustion system

- lube oil system

- turning gear

- governor and

- other auxiliaries and accessories

(2)Reduction gear.

(3) Generator and excitation system.

(4) AC auxiliary power system including switchgear and motor controls.

(5) DC power system including battery, charger, and inverter if required.

(6) External heat rejection equipment if required.

(7) All mechanical and electrical controls.

(8) Diesel engine or electric motor starting system.

(9) Unit fuel skid

(10) Intake and exhaust ducts

(11) Intake air filters

(12) Acoustical treatment for intake and exhaust ducts and for machinery.

Example 2 : Components of a Switchyard

Power Transformer,

Reactors

Instrument Transformers (Current and Voltage/Potential Transformer),

Disconnect Switches

ASB-NEPAL 41

Bushings

Surge Arresters

Standoff Insulators

Earthing switches.

Example 3 Component of Building

In Example 3 , (i) Plumbing , (ii) Fire Protection System , (iii) Elevator System , (iv) Fixed Equipment and (v) Misc. construction are clubbed together and recognised as a separate component of the building. Similarly, (i) HVAC, (ii) Floor coverings, and (iii) Interior Finish are clubbed together as a separate components as they have same useful life.

Estimated % to Costs

Useful Life

Building Envelope 38% 60

Electrical & Lighting 11% 20

Plumbing 6% 20

Fire Protection 2% 20

Elevator Systems 1% 20

Fixed Equipment 2% 20

HVAC 17% 15

Floor Coverings 2% 15

Interior Finish 12% 15

Misc. Construction 6% 20

Roofs 3% 10

Total 100%