IND AS-16Property, Plant and Equipments

By – MANUL JAIN

SCOPE Accounting for Property, Plant and

Equipment except when another Standard requires or permits a different accounting treatment.

Does not Apply to:- Property, Plant and Equipments classified as held

for sale (Ind AS 105) Biological Assets related to agricultural activity

other than Bearer Plants (Ind AS 41) Exploration and Evaluation Assets (Ind AS 106) Mineral Rights and Mineral Reserves

Property, Plant and Equipment(PPE)- Definition

Tangible items held for:-1. Use in production or supply of goods and services

2. Rental to others3. For administrative purposes

“AND” Expected to be used

during more than one period

RECOGNITION CRITERIAThe cost of an item of Property, Plant and Equipment shall be recognized as an asset if:

(a) It is probable that FUTURE ECONOMIC BENEFITS from PPE will flow to the entity; “AND”

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

SPARE PARTS, STAND BY EQUIPMENTS AND SERVICING EQUIPMENTS

To be recognized as PPE only when they meet the definition of Property, Plant and Equipment, otherwise such items are classified as INVENTORY

Do not recognize the cost of day to day servicing of the items, as they are primarily the costs of labour and consumables, and may include the cost of small parts.

Costs of each Major Inspection is recognized in the carrying amount of the item of PPE if the recognition criteria are satisfied.

MEASUREMENT AT RECOGNITION

An item of PPE that qualifies for recognition as an asset shall be initially measured at its COST.

Recognition of costs in the carrying amount of an item of PPE ceases

when it is in the location and condition necessary for it to be

capable of operating in the manner intended by the management.

ELEMENTS OF COSTIts Purchase price, including import duties and non

refundable purchase taxes, after deducting trade discounts and rebates.

Costs directly attributable to bring

the asset to the location and

condition necessary for it to be capable of operating in the

manner intended by the management.

The initial estimate of the costs of

dismantling and removing the item and restoring the site on which it is

located.

DIRECTLY ATTRIBUTABLE COSTS

Costs of employee benefits arising directly from the construction or acquisition of the item;

Costs of site preparation; Initial delivery and handling costs; Installation and assembly costs; Costs of testing after deducting the net

proceeds selling any items produced; Professional fees.

COST ELEMENT - EXCLUSION

1. Costs of operating a new facility;

2. Costs of introducing a new product or service or conducting business in a new location;

3. Administration and other general overheads;

4. Initial operating losses, such as at the time when the demand builds up;

5. Costs of relocating or reorganizing part.

EXCHANGE OF ASSETS

If PPE is acquired in

exchange for a non- monetary asset or assets,

or a combination of monetary and

non monetary assets.

Measured at FAIR VALUE

unless:(a)The exchange transaction lacks

commercial substance

OR(b) Fair value of neither the asset

received nor given up can be

reliably measured.

If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset

given up.

MEASUREMENT AFTER RECOGNITION

Two Alternatives available:

COST MODEL

Revaluation

Model

These Models are Accounting Policies and should be applied on each class of asset.

COST MODEL After recognition as an asset, an item of PPE

shall be carried at :

ITS COST

LESS ANY ACCUMULATED DEPRECIATION

LESS ANY ACCUMULATED IMPAIRMENT LOSSES

REVALUATION MODEL After recognition as an asset, an item of PPE shall be

carried at:Revalued amount, being its fair

value as at the date of revaluation

Less any subsequent accumulated depreciation

Less any subsequent accumulated impairment

losses

Revaluation Model – Imp. Points

Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from fair value at the end of reporting period.

If an item of PPE is revalued, the entire class of PPE to which the asset belongs shall be revalued.

The items within a class of PPE are revalued simultaneously to avoid selective revaluation of assets and reporting of amounts in the Financial Statements that are a mixture of costs and values as at different dates.

REVALUATION ADJUSTMENT

UPWARD REVALUATION

• Recognized in other comprehensive income and accumulated in equity under heading of Revaluation Surplus.

• Recognized in P&L to the extent of revaluation decrease of same asset previously recognized in P&L

DOWNWARD REVALUATION

• Recognized in P&L• Recognized in other

comprehensive income to the extent of any credit balance existing in revaluation surplus in respect of that asset.

REVALUATION SURPLUS TREATMENT

1• Transfer the whole of the

surplus directly to retained earnings when the asset is derecognized.

2• Transfer an amount equal

to the difference between depreciation based on revalued carrying amount of the asset and that based on asset’s original cost to retained earnings.

DEPRECIATION Depreciation is the systematic allocation of the

depreciable amount of an asset over its useful life.

Depreciation of an asset begins when it is available for use, i.e., it is capable of being operated in the manner intended by the management.

Depreciable amount = (Cost or Substituted Cost)-Residual Value

Residual Value = Estimated proceeds from the Disposal of asset – estimated cost of Disposal

USEFUL LIFE OF AN ASSET- KEY FACTORS

Expected usage of the asset.

Expected physical wear and

tear, which depends

upon various

operational factors

Technical or

commercial

obsolescence arising

from:(a) Change

or improveme

nt in Production

;(b) Change

in the market demand

Legal or Similar

limits on the use of the asset

DEPRECIATION - KEY POINTS Each part of an item of PPE with a cost that is significant in relation to

the total cost of the item shall be Depreciated Separately. (Component Accounting)

Entity allocates the amount initially recognized in respect of an item of PPE to its significant parts and depreciate separately each such part.

The Depreciation charge for each period shall be recognized in Profit and Loss unless it is included in the carrying amount of another asset.

The residual value, useful life and method of depreciation shall be Reviewed at least at each Financial Year End and any change(s) in them shall be accounted for as a Change in Accounting Estimate in accordance with Ind AS 8.

DEPRECIATION METHODS The Depreciation Method used shall reflect the pattern in

which the Asset’s Future Economic Benefits are expected to be consumed by the entity.

Straight Line

Method

Diminishing

Balance Method Units of

Production Method

DEPRECIATION

METHODS

IMPAIRMENT

Impairment of assets including items of PPE

dealt by Ind AS 36

Compensation from third parties for items of PPE

impaired, lost or given up shall be included in P&L

when it becomes receivable.

DERECOGNITIONThe carrying amount of an item of PPE shall be derecognized:• On Disposal; OR• When no Future Economic Benefits are expected

from its use or disposal.The Gain or Loss arising from Derecognition shall be included in Profit or Loss when the item is derecognized. Gains shall not be classified as Revenue.

The Gain or Loss arising from the derecognition shall be determined as the difference between the Net Disposal Proceeds, if any, and the Carrying Amount of PPE.

DISCLOSURE Measurement bases for determining the Gross carrying amount; Depreciation methods used; Useful lives or the Depreciation rates used; Gross carrying amount and the accumulated depreciation at the

beginning and end of the period; Reconciliation of the Carrying Amount at the beginning and end

of the period (Additions; Assets classified as held for sale; Acquisitions through Business Combinations; Revaluation, Impairment; Depreciation; exchange differences and other changes)

The existence and amounts of Restrictions on Title to items of PPE; Items of PPE Pledged as Security for Liabilities; Contractual Commitments for the acquisition of PPE; Amount of Compensation from third parties for item of PPE (if not

disclosed separately in P&L)

Disclosures – Revalued Assets The effective date of the revaluation; Whether an independent valuer was

involved; Carrying amount of each class of PPE, if the

Cost Model had been applied; The revaluation surplus, indicating the

changes for the period and any restrictions on the

distribution of the balance to shareholders.