Ind AS 16 on PPE

Understanding Ind AS CA PRANAV JOSHI, PARTNER | P. G. JOSHI & CO.

CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants 1

Ind AS 16 PLANT, PROPERTY & EQUIPMENT

Basics of Ind AS HOW IS IT FRAMED?

CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants 3

Framework

• Sets the basic boundaries of the standard;

• Gives definitions of key terms used in the standard Objective, Scope

& Definitions

• Tells us what can be accounted for in the books

• Does not tell the amount/value to be accounted Recognition

• Gives rules for arriving at the value at which the recognised item is to be accounted for

Measurement

• Gives principals for removing a recognised item De-recognition

• Information to be made available to the reader for better understanding of the financial statements

Disclosures

4 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

Ind AS 16 PROPERTY, PLANT AND EQUIPMENT ( PPE)

Overview of the Session Objective, Scope

& Definitions

Recognition

Measurement

De-recognition

Disclosures

Initial Recognition

Subsequent Recognition

At Recognition

After Recognition

Cost Model

Revaluation Model

Depreciation


Objective, Scope & Definitions

BASIC BOUNDARIES OF THE STANDARD

DEFINITIONS OF KEY TERMS USED IN THE STANDARD


PPE A/c

The objective of this Standard is to prescribe the

accounting treatment for Plant, Property and

Equipment [PPE].

Objective


The Principal Issues in accounting for Property,

Plant and Equipment are:

Principle Issues

Particulars Ind AS Indian GAAP

Recognition of the Assets Ind AS 16 AS 10

Determination of their Carrying Amounts Ind AS 16 AS 10

Depreciation Charges Ind AS 16 AS 6

De-Recognition Ind AS 16 AS 10


Scope

This Standard Shall be applied in accounting for PPE

except when another standard requires / permits

different accounting treatment

Scope Exception:

◦ PPE which has been classified as Held For Sale – Ind AS 105

◦ Biological assets related to agricultural activity – Ind AS 41

◦ Exploration and evaluation assets – Ind AS 106

◦ Mineral rights and Mineral reserves such as oil & non

generative resources


Definitions

PPE (IND AS 16)

All tangible Items that are

◦ Held for the purpose of

• Production or Supply of goods and services; or

• for rental to others; or

• for other administrative purposes; and

◦ Expected to be used during more than one period.

FIXED ASSETS (AS 10)

Fixed asset is an asset

◦ Held with the intention of

• being used for the purpose of producing or providing goods or services; and

◦ Is not held for sale in the normal course of business.


DEPRECIABLE AMOUNT (IND AS 16)

Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.

GROSS BOOK VALUE (AS 10)

Gross book value of a fixed asset is its historical cost or other amount substituted for historical cost in the books of account or financial statements.

When this amount is shown net of accumulated depreciation, it is termed as net book value.


Definitions

Carrying Amount

◦ Amount at which an asset is recognized after deducting any

accumulated depreciation and accumulated impairment losses

Cost

◦ 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

Depreciation

◦ Systematic allocation of the depreciable amount of an asset over its

useful life.


Definitions (Contd.)

Definitions (Contd.)

Residual value

◦ Estimated amount that an entity would currently obtain from

disposal of the asset, after deducting the estimated costs of disposal.

Useful life

a. Period over which an asset is expected to be available for use by

an entity; or

b. Number of production or similar units expected to be obtained

from the asset by an entity.


Recognition WHAT TO ACCOUNT FOR?


PPE A/c

? ?

Ind AS 16

◦ The cost of an item of PPE shall be recognised as asset, if

and only if –

◦ it is probable that future economic benefits associated with the

item will flow to the entity; and

◦ cost of the item can be measured reliably

AS 10

◦ Any item which falls under the definition of a fixed asset

should be recognised as a Fixed Asset.

Initial Recognition


1. Spare Parts & Servicing Equipment

If they can be used only in connection

with an item of PPE

Recognition criteria are met?

Spare Parts and Servicing Equipment

Day to Day servicing & Consumables

Expense out Capitalise

No

Yes



2. Major Inspection

◦ Ind AS 16 requires that the cost of major inspections should be

capitalised with consequent de-recognition of any remaining carrying

amount of this cost of the previous inspection. Existing AS does not

deal with this aspect.


100% 80% 60% 40%

2011 2012 2013 2014

Inspection Cost

Cost of Asset

Derecognize


Component Approach

“Each part of an item of property, plant and equipment

with a cost that is significant in relation to the total cost

of the item shall be depreciated separately.”

This inter se requires separate recognition of each

component. The same would require the auditor’s

judgment on:

◦ Separable criteria – Significant Cost

◦ Useful Life


Particulars Allocated cost Residual value Useful life Depreciation

Keel 120,000,000 6,000,000 25

4,560,000

Bridge 70,000,000 10,500,000 2,380,000

Bulkhead 90,000,000 9,900,000 20

4,005,000

Propulsion system 30,000,000 3,000,000 1,350,000

Decks 100,000,000 5,000,000 15

6,333,333

Boiler 10,000,000 1,000,000 600,000

Refrigeration system 20,000,000 4,000,000 11

1,454,545

Fresh water generator 10,000,000 1,000,000 818,182

Total 45,00,00,000 4,04,00,000 2,15,01,060

Component Approach (Example)


CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

Q&A A company installed a turbine in 2007. It bought another turbine

in 2009 as backup in case the installed one fails. Cost of the 2nd is

nearly same as the 1st, and probability that it will be used is quite

low. It classifies the 2nd turbine under inventory as an

“emergency spare”?.

Q – Is this accounting correct?

21

A – No. Though use of this stand-by equipment will be irregular, it fulfils both conditions of recognition and is a PP&E to be separately depreciated over the shorter of its expected useful life (from 2009) or the life of the plant the turbine is part of.

Q&A

Company M buys five new machines for use in its

production facility. Simultaneously, it purchases a spare

motor to be used as a replacement if a motor on one of the

five machines breaks.

Q – Should the spare motor be classified as PP&E?


A – As this major spare will be used in production of goods,

and once brought into service, will be operated during more

than one period, it should be classified as PP&E.

AMOUNT INITIALLY TO BE ACCOUNTED FOR

Measurement at Recognition


PPE A/c

Asset ?

Measurement at Recognition – At Cost

An item of PPE that qualifies for recognition as an asset

should be measured at its cost.

Elements of Cost

◦ Purchase price

◦ Directly attributable costs to bringing the asset to the location

and condition necessary for it to be capable of operating in the

manner intended by management.

◦ Initial estimate of dismantling, removal and site restoration

costs (recognized and measured in accordance with Ind AS 37

Provisions, Contingent Liabilities and Contingent Assets)


Elements of Cost

Purchase Cost Including Taxes, Net off rebates

Direct Attributable Costs to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Eg: Site Preparation, Professional Fees, Freight.

Initial estimate of dismantling, removal and site restoration costs Estimated cost of leaving the land in the condition as it was acquired Eg: Mining Industry, Nuclear Power Plant.


Purchase Price

Cash Purchase: Cash Price Equivalent at the time of

recognition.

◦ If the payment is deferred, the price is discounted to the

PV at the time recognition.

Exchange of Assets

◦ Fair value of the asset given up, unless the Fair value of

acquired asset is more clearly evident.


Q&A A company acquired a machine that its employees had never operated

before. During installation, employees received intensive training. Cost

includes hiring of trainers + directly attributable cost of employee wages

for the training days. Without training, the machine could not have

been used.

Q – Can the training costs expenses and employee wages be

capitalised?


A – The Training costs can be directly attributable to the operating of

the machine. The employee wages will not be directly attributable.

Cessation of recognition

Recognition of costs in the carrying amount of an

item of property, plant and equipment ceases

when the item is in the location and condition

necessary for it to be capable of operating in the



Cessation of recognition

Purchase Cost Direct Attributable Costs

Initial estimate of dismantling, removal and site restoration costs

January, 2016 March, 2021

Cessation of Recognition

March, 2016


Present Value (PV)

Dismantling, Removal & Site Restoration (part of Ind AS 37)

March, 2016 (PV @ 10%)

March, 2021 (Absolute)

Rs. 62.09 Rs. 100

31.03.2017 Depreciation A/c. Dr. Rs. 12.42 (Rs. 62.09/5 Years) To PPE Rs. 12.42 (Rs. 62.09/5 Years) P&L A/c. Dr. Rs. 6.209 (Rs. 62.09 * 10%) To Prov. For Dismantling Liability Rs. 6.209 (Rs. 62.09 * 10%)

Unwinding of Discounting


31.03.2016 PPE A/c Dr. Rs. 62.09 To Prov. For Dismantling Liability Rs. 62.09

Illustration Year PPE A/c

(PV of Cost) P&L A/c

Unwinding @ 10% of provision amount)

Provision A/c

Dr. Dr. Cr.

31-03-16 62.09 - 62.09

31-03-17 - 6.21 68.30

31-03-18 - 6.83 75.13

31-03-19 - 7.51 82.64

31-03-20 - 8.26 90.91

31-03-21 - 9.09 100.00

Total 62.09 37.91

Total amount required for dismantling!


Recognition – Other considerations

Expenditure and Income from incidental Operations

before or during construction/development not in

connection with construction/development are not

recognized as PPE (Para 21). For example, incidental

income during construction.

Self constructed assets should exclude

◦ Internal profits;

◦ Abnormal wastages eliminated; and

◦ Borrowing cost only to the extent recognized under Ind AS 23

(Para 22)


POST CAPITALIZATION ACCOUNTING

Measurement after Recognition


PPE A/c

Asset xxx +/- ?

Subsequent Measurement

Accounting Policy to applied to entire class of asset

Accounting Policy

Cost Model

Cost

Less Accumulated Depreciation

Less Impairment Losses

Revaluation Model

Revalued amount

Less Subsequent accumulated

Depreciation

Less Impairment Losses


Class of Asset A class of property, plant and equipment is a grouping

of assets of

a similar nature and

use in an entity’s operations.

The following are examples of separate classes:

◦ Land Land And Buildings

◦ Machinery Ships

◦ Aircraft Motor Vehicles

◦ Furniture & Fixtures Office Equipment


Revaluation Model – Basic Rules

I. Revaluation Should be done for entire class of

PPE

II. Revaluation should be done at sufficient

regularity

• Frequency of revaluation depends upon the volatility

of change in the fair value.


At fair value

Done for class

of assets

Increase Decrease

Disclosed as part of Equity as

“Revaluation Surplus”

If Credited to P&L

Before, Debit to

that extent

Adjusted against existing

“Revaluation Surplus”

Credited to

Income

statement

Revaluation Model


Revaluation Model


Reval. Surplus Asset P&L (Income) Asset

P&L (Income) Reval. Surplus

Asset P&L (Income) Reval. Surplus

Asset

Upward Revaluation - Initial Downward Revaluation - Initial

Downward Revaluation - Subsequent Upward Revaluation - Subsequent

Depreciation


PPE A/c

Asset xxx +/- yyy

Depreciation

Systematic allocation of the depreciable amount

of an asset over its useful life.

◦ Depreciable Amount = Cost – Residual Value

◦ Useful Life = Period or Production

◦ Systematic Basis = Depreciation Method (SLM, WDV or

Units)

◦ Residual value and useful life to be reviewed at end of

each financial year


Component Approach

◦ Each part of an item of PPE with a cost that is significant

to total cost shall be depreciated separately.

◦ An entity shall allocate total cost to significant parts of an

asset and depreciates separately each such part.

◦ More than one significant parts can have same useful life

and depreciation method such parts may be grouped in

determining the depreciation charge.

Depreciation


Particulars Allocated cost Residual value Useful life Depreciation

Keel 120,000,000 6,000,000 25

4,560,000

Bridge 70,000,000 10,500,000 2,380,000

Bulkhead 90,000,000 9,900,000 20

4,005,000

Propulsion system 30,000,000 3,000,000 1,350,000

Decks 100,000,000 5,000,000 15

6,333,333

Boiler 10,000,000 1,000,000 600,000

Refrigeration system 20,000,000 4,000,000 11

1,454,545

Fresh water generator 10,000,000 1,000,000 818,182

Total 45,00,00,000 4,04,00,000 2,15,01,060

Component Approach (Example)


Depreciation

“The depreciation charge for each period shall be

recognized in profit or loss unless it is included in

the carrying amount of another asset”

If future economic benefits are embodied / absorbed in

producing another assets than the depreciation charge

constitutes part of the cost of the other asset and is

included in its carrying amount.

For example, the depreciation of manufacturing plant and equipment

is included in the costs of conversion of inventories (Ind AS 2).


When to Start?

Depreciation 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



When to Start?

Purchase Cost Direct Attributable Costs

Initial estimate of dismantling, removal and site restoration costs

January, 2016 March, 2026

March, 2016 Capitalize

Depreciate


Depreciation is recognized despite fair value

exceeding carrying cost, unless residual value

exceeds carrying cost.

◦ Where residual value increases to an amount equal to or

more than carrying cost, there is no depreciation charge

till the residual value reduces

Other Issues

RV

BV

/CA

RV

BV

/CA

Depreciate Do not Depreciate


Cessation of Depreciation

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 Ind AS 105; and

◦ the date that the asset is derecognized.


Shall reflect the pattern in which the asset’s economic

benefits are expected to be consumed

Method applied to be reviewed at end of each financial year

Method selected is to be applied consistently unless there is

a change in the expected pattern of consumption of

economic benefits from the asset

Change in method of depreciation is to be treated as a

change in the estimate (Ind AS 8) (As against change in

accounting policy as per current AS 6)

Depreciation Method


Accounting for Accumulated Depreciation on Revaluation

Two ways are:

1. Accumulated Depreciation to be restated

proportionately with the change in the gross carrying

amount of the asset so that the carrying amount of the

asset after revaluation equals its revalued amount.


Accounting #1

Asset A/c Depreciation Reserve A/c

P&L A/c Revaluation Surplus A/c

Bank Rs. 100 P&L Rs. 10 P&L Rs. 10

Dep. Res. Rs. 10 Dep. Res. Rs. 10

Asset A/c Rs. 50

Original Cost of Asset = Rs. 100 Revalued Amount = Rs. 120

P&L Rs. 10 Rev. Res Rs. 50

Dep. Res. Rs. 10

Cost = Rs. 100 CA = Rs. 80 Cost = ? CA = Rs. 120

Cross Multiply: 100 x 120 = Rs. 150 80

Dep. Res. Rs. 10

Revised Depreciation = 150 x 10% x 2 = Rs. 30


Accounting for Accumulated Depreciation on Revaluation

2. Accumulated Depreciation to be eliminated against the

gross carrying amount of the asset and the net amount

restated to the revalued amount of the asset.


Accounting #2

Asset A/c Depreciation Reserve A/c




Asset A/c Rs. 40

Original Cost of Asset = Rs. 100 Revalued Amount = Rs. 120

Asset Rs. 20

Rev. Res Rs. 40

Dep. Res. Rs. 20

Net Carrying Amount = Rs. 100 – Rs. 20 = Rs. 80 Revalued Amount = Rs. 120 Increase is Gross Amount = Rs. 120 – Rs. 80 = Rs. 40


Accounting for Revaluation Surplus


Balance in Revaluation Surplus may be transferred to

Retained Earnings on disposal of asset.

However, some of the surplus may be transferred as the

asset is used by an entity in proportion to the depreciation

charged. However, transfers from revaluation surplus to

retained earnings are not made through profit or loss.

Such accounting will result in lower Profits as depreciation

on revalued portion is not routed through P&L A/c.

Accounting #Revaluation Surplus Asset A/c Depreciation Reserve A/c




Asset A/c Rs. 40

Asset Rs. 20

Rev. Res Rs. 40

Dep. Res. Rs. 20

Other Comprehensive Income

Rev. Res. Rs. 2

Depr. on Revalued Gr. C.A. = Rs. 12 (Rs. 120 x 10%) Depr. on Original cost = Rs. 10 (Rs. 100 x 10%) Difference = Rs. 02

Gen Res. Rs. 2


Dep. Res. Rs. 12

P&L Rs. 12

Impairment & De-recognition REMOVING A RECOGNIZED ITEM


PPE A/c

Asset xxx +/- yyy

Impairment

To determine whether the item of PPE is impaired

or not Ind AS 36 is to be applied.


De-recognition

Upon disposal (Sold or Entering into Finance Lease)

OR

When no future economic benefits are expected

from its use or disposal

Resultant gain or loss is included in the profit and

loss statement wherein gain is not classified as

‘revenue’


Disclosure


PPE A/c

Asset xxx +/- yyy

Notes: …?

Disclosures


For each class of property, plant, and equipment,

disclose:

◦ basis for measuring carrying amount –Cost or Revaluation

◦ depreciation method(s) used

◦ useful lives or depreciation rates

◦ gross carrying amount and accumulated depreciation and

impairment losses

Disclosures


Reconciliation of the carrying amount at the

beginning and the end of the period, showing:

◦ Additions / disposals

◦ Acquisitions through business combinations

◦ Revaluation increases or decreases

◦ Impairment losses / reversals of impairment losses

◦ Depreciation

◦ Net foreign exchange differences on translation

◦ Other movements

Thank You CA Pranav A. Joshi

Partner

P. G. Joshi & Co. , Chartered Accountants

www.pgjco.com

Ind AS 16 on PPE

Economy & Finance

Transcript of Ind AS 16 on PPE