Ind AS 16 : Property, Plant & Equipments

5. Valuation
1.Applicability 6.Depreciation 10.Schedule II
Policy

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2.Definition w.
7.Revaluation
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3. Recognition
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4.Cost du
8.Derecognition
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4.i Initial Cost 4.ii Subsequent 9.Disclosure , Others & First
Expense 4.iiii Consideration and Other
time adoption
A.Purchase Cost
A. Addition A. Cash G. Spare
D. Lease
B.Credit Parts
B. Expenses upto ready to
use B.Replacement
E. Self Constructed As-
C. Ex- set
C.Decommissioning, C. Non recurring change

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Restoration & Other cost expense F. Bearer Plants
 Ind AS 16 : Property, Plant & Equipments
1. Definition:
Property,Plant & Equipments are tangible items
a) Held for production of goods, rendering of services, rentals of administrative
Purpose.
&
b) Generate future benefits for more than 1 year.

2. Applicability: Exceptions : (i.e. does not apply to:)

i) Biological assets other than Bearer plants **
ii) Financial instruments (AS 131 Ind AS-109, 32, 107)
iii) Exploration & evaluation assets (guidance note)
Eg. Mines, quarries, oil fields
Note: Asset used in mining are covered in this Ind AS But mines are excluded.
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Property, Plant & Equipments held for sale (Ind AS 105),
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2.i Bearer plant:

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Is a living plant that is

a) Used in the production / supply of agriculural produce.
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b) Is expected to bear the produce for more than 1 year.

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c) Has remote likelihood of being sold except for incidental scrap sales.
Following are NOT Bearer plants:
1) Plants grown for being sold (Eg. Bamboos).
2) Plant life less than 12 months
3) Plants which are cultivated for produce as well as for the sale of plant itself
(for timber) etc.
Plants & Animals

Plants Animals

Bearer plants Others Ind AS 16 N.A.

Ind AS 16 Applies Ind AS 16 N.A.

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3. Recognition:
Expenditure will be recognized as PPE (Asset) if:-
(i) The enterprise shall have control over the future economic benefits from the
asset, which is probable that future benefits will flow to the enterprise for more
than 1 year.
(ii) Cost is reliably measurable.

PPE recognized as asset if all the 5 conditions are fulfilled -

1.Tangible
2.Held for use PPE - definition conditions
3.Held for more than 12 Month
4.Future economic benefits flow to enterprise PPE – Recognition condition
5.Cost is measureable

4. Cost : .in
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4.i Initial Cost:
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4.i.a Purchase Cost:

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Purchase cost = Purchase Price (-) Trade discount (excluding recoverable taxes)
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Discounts
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Given at the time of purchase Subsequent discounts

Reduce from cost of PPE Cash discount Other

If it represents
If it represents interest element Else (rare) renegotiation of
price
Reduce from the cost of PPE
initially itself. Consequently if such Treated as
cash discount is not availed then it discount Income Adjust from cost
will be recognized as Interest of PPE
expense in P/L a/c.

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* Trade Discount: Discount given at the time of sale/purchase.
* RE-negotiation: Subsequent discount on accounting of renegotiation of price.
Usually when price originally was provisionally decided, quality discount etc.
* Recoverable Taxes: Not added to the cost as it does not represent cost to the
enterprise but in the nature of prepaid taxes. Taxes, non recoverable for entity,
will be added to the cost of asset.

4.1.b Expenses upto ready to use:

>> Expenses incurred on asset upto making asset ready to use, (not put to use)
will be added to cost.
>> Income tax requires capitalization upto put to use leaving to creation of DTA/DTL
>> User training cost is not added to cost of the asset since it is incurred to make
user ready and not the asset.
>> Para 16 of Ind AS 16: any cost attributable to bring the asset to location &
condition necessary of it to be capable of operating in the manner intended by
management. .in
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Explanation: Managements intention is important to determine which cost will
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be capitalized, not the basis of evaluating which costs are avoidable or

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unavoidable for making asset ready for use for any user.
>> Abnormal cost (Like penalty, repair expenses) not added to the cost of asset
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>> Expense incurred Prior to acquisition of asset not added to cost of asset unless
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incidental as a consequence of to purchase the asset

>> Transit cost & transit insurance is to be added to the cost of asset (i.e cost
incurred to bring asset to managements intended location)
>> Initial operating losses beyond asset being ready to use till it achieves full
commercial production levels not added to cost
>> Expenses not included in cost of PPE:
1. General admin overheads
2. Sales & promotion overheads
3. Abnormal expenses
4. Initial operating losses
5. Cost incurred prior to acquisition of asset & not as a consequence to purchase the
asset
6. User training fees

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4.i.c Decommissioning, site restoration & other cost:
Decommissioning, site restoration expense shall be added to cost of PPE at
discounted value unless such expense relates to production of inventories.
A provision for such expense will be recognized as per Ind AS 37, which requires
recognition of a liability when there is present obligation arising out of past events
on reporting date.

4.ii Subsequent Costs

4.ii.a Additions:
>> If it satisfies the recognition criteria
>> Capitalize to cost of asset else charged to P or L.
>> Facts to be considered to determine whether it will be added to cost / recognized as
separate asset
4.ii.b Replacements & Non Recurring expenses (frequency is more than 1 yr)
>> Derecognize the carrying amount of existing part / non recurring cost, and
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Capitalize the replacement part/ non recurring expense to cost of PPE.
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4.iii Consideration
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4.iii.a Cash:
>> Cash consideration to be cost of PPE
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>> Cost of PPE to be net off any upfront discount

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4.iii.b Credit:
If asset acquired for deferred consideration then interest element to be excluded
from cost of PPE

4.iii.c Lease:
>> Initial recognition to be as per Ind AS 17
>> Subsequent accounting includes depreciation – Ind AS 16.

4.iii.d Exchange:
>> If the transaction has commercial substance and fair value of asset given or
acquired is determinable then record PPE at fair value of asset given up unless fair

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 value of asset acquired is more evident.
>> If the transaction doesnt have commercial substance or fair value of asset given
or acquired is not determinable then recognise asset acquired at carrying amount
of asset given up.

Notes :
(i) Commercial Substance:-
Transactions will have commercial substance if:
a) Configuration of cash flows from asset given to assts acquired are different
OR
b) Entity specific fair value (i.e. Pv of cash flows from asset that may be earned by
entity)
Provided difference is significant in relation to fair value of asset exchanged.

(ii) Evident Fair Value:-

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FV that is more precise is considered to be more evident.
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Explainations-
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>> Active market price is more evident than Arm’s length price.
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>> Value of new asset is more evident then value of old asset.
>> When listed company share is exchanged with new asset then Ind AS 16 is not
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applicable. Ind AS 102 applies which requires fair market value of shares given to
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be considered unless fair value of goods & services acquired is available.

(iii) If PPE acquired against consideration of:-

a) Shares: As per Ind AS 102, fair value of PPE to be recognized as cost unless it is
not available, wherein fair value of equity instruments granted to be recognized
as cost.
b) Receivables / other monetary items: Not treated as exchange. receivables are 1st
recognized at its recoverable amount and this amt will be treated as cost of PPE
acquired.

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4.iii.e Self Constructed Asset :
>> Cost directly attributable + cost reasonably allocable will be added to cost of PPE
till the asset is ready for managements intended use.
>> Capital advance given (like advance to labour contractor) not to be added to CWIP
but shown separately as Non-Current Assets - Advances – Capital advance.
>> Borrowing costs as per Ind AS 23 on borrowing cost.
>> Depreciation on own equipment used in construction will be included on pro data
basis.
>> No opportunity cost, abnormal losses, income/expense that do not relate to
construction of asset are included in cost.
>> Till PPE is under development shown as CWIP under Non-Current Assets.

4.iii.f Bearer Plants :

Recognised at cost, similar to self constructed assets.

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Biological Assets
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Plants Livestock
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Bearer Plants Others

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(living animals
like cow etc.)
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Plants held for bearing

produce to be harvested but
does not includes
Ind AS 41
a)Plant life < 12 months
b)Plants themself held for
harvest / sale as goods
c)Plants that are held for
bearing produce & also for
sale other than sale as a
residue.

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4.iii.g Spare Parts:
>> If spare parts meets the recognition criteria for PPE then recognized as PPE else
inventory.
>> Spare parts purchased separately if recognized as PPE, should be separately
recognized (separate from PPE)

ICAI Clarification

Spare Parts

Life < 12 months Life > 12 months

Inventory PPE, Provided other

conditions are met

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One which qualify as PPE will be recognized as
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PPE & depreciation over its useful life will be de-
rived from life of asset.
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5 Valuation Approach
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>> Cost approach

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>> Revaluation approach

5.i Cost Approach :

5.i.a Key Notes-
>> Systematic allocation of depreciation amount (cost (-) estimated residual value)
over its useful life.
>> Depreciation is charged to P or L unless PPE is used in connection with
production/ construction/ development of an asset.
>> Method of charging depreciation should be such that ‘depreciation charged
reflects the pattern over which future economic benefits of asset are expected to
be consumed by the enterprise’.
>> Ind AS does not prescribes any particular methods & permits use of any method
including SLM, WDV & usage based depreciation methods.

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>> Under any method, depreciation is charged from date when asset is ready to use.
>> However, under usages based method no depreciation. is charged, if asset is not
used during the period.
>> Choice of method to be based on not just the pattern of consumption of asset but
also considering other factor like technological obsolescence, regulatory factors etc.

5.i.b Component accounting:

Ind AS 16 requires -
>> Every part of asset (PPE) has value significant to that of the asset (PPE) should
be depreciated separately as per its useful life & method appropriate to such part.
>> Parts having similar life & method may be clubbed together for purpose of charging
depreciation
>> All insignificant value parts may be also clubbed with PPE for charging
depreciation.
>> Above principle also applicable to ‘Non recurring significant expense’ on PPE
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5.i.c Derecogniton- Recognition accounting (Replacement accounting):
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>> Whenever any part is replaced with another part the carrying amt of replaced part
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to be derecognized through P or L (net of selling price if any) & the cost of re

placed part to be added to the cost of PPE and depreciation is to be charged on
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such part over its remaining useful life.

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>> It applies to non-recurring significant expense too. (Like heavy non annual
maintenance cost.) Replacement Accounting: Replacement of part/
significant maintenance/other cost
Replaced part was identified & Replaced part was depreciated
depreciated separately right along with PPE
on the date of acquisition
Derecognize : Computed/derived*
Derecognize: Carrying amount of old carrying amount of the replaced part
part through P or L. through P&L.
Recognize: New part to be capitalized New part capitalized to be
& dep. over its own useful life. depreciated over its useful life.
* Computed / Derived carrying amount:-
Step 1: Identify cost of replaced part on the date of acquisition
Step 2: Derive carrying amount

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6. Depreciation
6.i Key Points:
>> The depreciable amount of an asset should be allocated on a systematic basis over
its useful life. The depreciation charge for each period should be recognised in profit
or loss unless it is included in the carrying amount of another asset.

>> 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 should be depreciated
separately.

>> A significant part of an item of property, plant and equipment may have a
useful life and a depreciation method that are the same as the useful life and
the depreciation method of another significant part of that same item. Such parts
may be grouped in determining the depreciation charge.

>> .in
To the extent that an entity depreciates separately some parts of an item of
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property, plant and equipment, it also depreciates separately the remainder of the
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item. The remainder consists of the parts of the item that are individually not
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significant.
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>> Land and buildings are separable assets and are accounted for separately, even
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when they are acquired together.

>> If the cost of land includes the costs of site dismantlement, removal and
restoration, that portion of the land asset is depreciated over the period of benefits
obtained by incurring those costs.

6.ii Residual Value:

>> The residual value and the useful life of an asset should be reviewed at least at
each financial year- end and, if expectations differ from previous estimates, the
change(s) should be accounted for as a change in an accounting estimate in
accordance with Ind AS 8, Accounting Policies, Changes in Accounting Estimates
and Errors.

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>> The residual value of an asset may increase to an amount equal to or greater
than the asset’s carrying amount. If it does, the asset’s depreciation charge is
zero unless and until its residual value subsequently decreases to an amount be
low the asset’s carrying amount.

>> Depreciation is recognised even if the fair value of the asset exceeds its
carrying amount, as long as the asset’s residual value does not exceed its
carrying amount. Repair and maintenance of an asset do not negate the need to
depreciate it.

6.iii Commencement 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.

6.iv Cessation of depreciation : .in

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>> Depreciation of an asset ceases at the earlier of:
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a) the date that the asset is classified as held for sale (or included in a disposal
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group that is classified as held for sale) in accordance with Ind AS 105.
b) and the date that the asset is derecognised.
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>> Therefore, depreciation does not cease when the asset becomes idle or is retired
from active use unless the asset is fully depreciated. However, under usage
methods of depreciation the depreciation charge can be zero while there is no
production.

6.v Expected useful life of asset :

>> Life over which management intends to use the asset i.e. useful life from mgt’s
perspective.
>> Determined either in:
a) Time (years & months)
b) Revenue Based : Entity should not allocate depreciable amount of PPE in
proportion of revenue UNLESS, the asset has a life directly connected with
revenue it generates.As revenue is influenced by various factors unrelated to use

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 of asset life inflation / demand etc.

6.III Depreciation Method:

>> The depreciation method used shall reflect the pattern in which the asset’s future
economic benefits are expected to be consumed by the entity.
>> The depreciation method applied to an asset is reviewed at least at each financial
year-end and, if there has been a significant change in the expected pattern of
consumption of the future economic benefits embodied in the asset, the method
should be changed to reflect the changed pattern. Such a change is accounted for
as a change in an accounting estimate in accordance with Ind AS 8.

Depreciation

Asset unused or
Fair Value >
Carrying Amount Residual value .in held for sale or
included in a dis-
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(Residual value is > = Carrying
posal group that
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less than carrying Amount

is classified as
amount)
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held for sale

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Depreciation Depreciation
Depreciation Zero
Charged Ceases

7. Revaluation of Property, Plant & Equipments :

a. Para 29 requires entity to make a choice between cost approach (para 30) &
Revaluation approach (para 31).
b. Choice is a matter of accounting policy.
c. The choice should be made for a class of asset and assets on selective basis.
d. Class of assets are group of assets with similar characteristics.
e. Entity following revaluation approach:
i) Should revalue the complete class of asset unless the fair value of any asset is
not determinable.

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 ii) Revaluation to be done at fair value i.e. price at which asset can be sold in an
orderly transaction between market participants (selling price)
iii) Revaluation gain/loss :

1st Time Subsequent

Gain Loss Gain Loss

OCI P or L
OCI, unless any P or L except to
loss recognized the extent of gain
Revenue earlier on that earlier recognized
Reserve asset, through through OCI the
P or L loss will also be
debited to OCI
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iv) Depreciation charged on revalued amounts & debited to P or L.

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v) Excess of depreciation charged on revalued asset over depereciation on cost,

can be transferred from OCI to Retained Earnings?
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in statement of OCI [no effect on SPL] (appear as revaluation reserve in SOCIE)

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vi) On Sale of asset:

Selling Price > Selling Price = Selling Price <

Carrying Amount Carrying Amount Carrying Amount

Gain transferred
to P or L Loss on sale to the
extent of (net) Re-
valuation gain
Balance in Revaluation Reserve if any realized through OCI
transferred to Retained Earnings. will be
(Remember! Revaluation Surplus is a adjusted through OCI,
Non Reclassifiable OCI item) balance
recognized in P or L.

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 vii)Asset held for sale: Accounted under Ind AS 105 No further revaluation.
f. Frequency of revaluation:
>> Entity to decide based on volatility of fair value of PPE.
>> Volatile value assets – annual revaluation.
>> Others - once in 3 to 5 years..
>> Entity to ensure that the fair value and carrying amount are not significantly
different
g. Accounting entry for revaluation gain :
Option 1
Accumulated Depreciation Dr. [To the extent of accumulated
(Provision for Depreciation) Depreciation]
PPE Dr. [Balance available]
To PPE [Excess if any]
To OCI [Deficit if any
Revaluation gain]
OR .in
(i) Accumulated Depreciation Dr. [Balance of accumulated Depreciation]
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To PPE [Balance of accumulated Dep.]
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(ii) PPE Dr. [Revaluation gain]

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To OCI [Revaluation gain]

Option 2
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Increase the proportionate cost & accumulated depreciation to bring asset to its
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revalued amt from carrying amt.

8. Derecognition : Derecognition

Asset is Sold Asset is Discarded

Cost approach Revaluation Revaluation Cost approach

approach approach
P or L
Profit Loss
Profit /loss
transferred • P or L • 1st adjust from revaluation reserve to the extent
to • Existing Revaluation of profits earlier transferred to Revaluation Reserve
p or L Reserve Transferred to (through OCI)
Reserves in SOCIE • Excess loss to P or L

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9. Disclosures , Others & First Time Adoption
9.1 Disclosures:
i. Reconciliation of PPE: Opening, addition, sale, discarded, reclassified as held for
sale, acquired under business combination, impairment/reversal, depreciation,
changes due to forex fluctuation etc. and closing for each class of asset.
ii. Approach of valuation: Cost/Revaluation approach for each class of assets.
iii. Useful life, residual value, methods.
iv. Change in estimates of Life /Residual Value / Method.
v. If revaluation approach followed:-
Policy of frequency of revaluation.
a)
Date of revaluation of assets during the year.
b)
Revaluation gain/loss and its accounting.
c)
d) Basis of fair value determination / independent value appointed?
vi. Capital work in progress.
vii. Capital commitments (contracts entered to acquire PPE in future)
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Compensation received from 3rd parties, if any, like insurance Co. etc. against
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impairment / giving up / loss of PPE
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ix. Recommendatory disclosure:-

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Carrying amt of idle PPE (ready to use but not put to use)
a)
Gross carrying amt of fully depreciated assets
b)
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c)Assets that are retired from use but not classified as held for sale
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Fair Value (if materiality different) of PPE when cost approach followed
d)
x. Restriction/change if any on PPE.

9.2 Other:
a. Impairment (decline in the value of asset):
>> Impairment is recognized as per Ind AS 36
>> Ind AS 36 requires impairment loss to be recognized if CA > RA
>> Recoverable amt is higher of:
a) Value in use ( N of fcfs + terminal cash flows)
or
b) Net selling price
Impairment loss is to be checked when indication exists or as required by
Ind AS 36

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>> PPE that are revalued, may still have impairment as Revaluation is made of selling
price and impairment loss is based on recoverable amount that is based on net
selling price.
>> Hence impairment & revaluation must co-exist.
>> Impairment loss on revalued assets is accounted similar to accounting of loss on
de-recognition of revalued asset.

b. DSR cost:

DSR Cost-Change in
Estimate

Revaluation
Cost approach
approach

Adjusted from cost of PPE & .in Not adjusted from cost of PPE
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&
depreciation to be revised
Provision for DSR to change and treat
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prospectively
increase/decrease in liability as a
&
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revaluation loss/gain.
provision for DSR to change.
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c. Stripping Activity: Activity of creating an approach to the reserves of mines /

quarries etc.
>> Usually mines etc. will have a layer which needs to excavated (removed) access
reserves of mine.
>> Cost incurred in removing such layer is termed as stripping activity cost.
>> When such cost are identifiable to an approach to the reserves contained in mine,
it is regarded as a capital expenditure in name of ‘Stripping Activity Asset’.
>> Stripping activity assets are depreciated over its use full life.
>> Stripping activity assets are shown/ regarded as a part of the mines & not shown
separately as a PPE.

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d. Sale of PPE :
Not to be recognized as ‘Sales’ except if the entity is in business of renting PPE
to earn (operating) rental incomes. In such care, when PPE is recognised as held
for sale it will be recognized as inventory & on sale, sales income to be
recognized.

9.3 First time adoption:

Ind AS 101, requires entities first time adopting Ind AS, on transition date to:
a) Recognize all assets & liabilities that quality for recognition as Asset/Liability
under Ind AS.
b) Not recognize Asset & Liability that do not quality for recognition as Asset /
Liability under Ind AS.
Reclassify all items recognized as per previous GAAPs to classification as
c)
applicable under Ind AS as Asset or Liability or Equity.
d) Measure all assets & liabilities as per Ind AS.
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Ind AS 101 permits certain exemptions from such retrospective application of
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Ind AS.
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Such exemption is also available as an optional exemption for PPE, termed as

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Deemed cost exemption under para D7AA

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10. Deemed cost exemption :
yes
Prospective Accounting
Options given to consider
either of the following as
‘deemed cost’ on
transition date of PPE.
Option 1
Revalue PPE on transition
date at fair value. (FV as
per Ind AS) unless the PPE
is revalued under previous
GAAPs &
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a)FV on Transition Date is
not significantly different
from carrying amt of PPE.
b)Revaluation was done
under restructuring / public
issues.
or
c) Revaluation done
previously is adjusted from
price changes.
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Whether No
entity opts for Retrospective Accounting
deemed cost required
exemption ?
However, estimates of useful
life, residual value etc. relating
to PPE acquired before the
transition date will be made
considering the information
available upto the transition
Option 2
date as further evidencing
.in events relating to events exist-
ing on balance sheet date.
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Consider the carrying
amount of PPE as per
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previous GAAPs, as
deemed cost on
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transition date subject to
adjustment for [Cost of
DSR] Cost of DSR to be added to
carrying amount of PPE:
1.Determine present value of
DSR on date of acquisition of
PPE of Subsidiaries :- PPE.
• If subsidiaries were 2.Depreciate DSR for number
consolidated consider of years for which PPE has
carrying amt used in been in use as per life of PPE.
consolidated finan- Such depreciated DSR will be
cial statements. added to cost of PPE.
• If subsidiaries
not consolidat-
ed consider
carrying amount of
PPE of subsidiary as
appearing in SFS of
subsidiary.
>> Company whether opting option 1 or 2 is free to choose its accounting approach
for future accounting under Ind AS as cost approach/ revaluation approach.
>> Optional exemption is for ‘Measurement only, there is no ‘Recognition Exemption’
for PPE. i.e. PPE appearing under old GAAP, if does not qualifies to be PPE then it
has to be written off and vice-versa.
>> Option selection is available for entity as a whole & not class wise.

11. Schedule II to companies Act, 2013 : Prescribes useful life of Assets (PPE):
(Referred U/S 123 of companies Act 2013 on Dividend)
1. Applies to all companies except companies for which useful life/RV/Rate of Dep. is
prescribed elsewhere in other law.
2. Prescribes:
a) Useful life of assets: Any company, using any life (grater/Shorter) other than it
needs to should:-
i) Obtain professional certificate.
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ii) Disclose fact in financial statement.
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b) Residual Value: Permits Residual Value upto 5% cost. If company estimates
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greater RV then (i) & (ii) above applies.

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3. Depreciation is charged from date when asset is ready to use.

4. Depreciation is charged on cost/ revalued amounts.
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5. Method:
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SLM/WDV/any other appropriate method.

(Toll Roads: Revenue, proportionate depreciation method prescribed)
(No other prescription in schedule II for intangible assets)
6. Change in useful life/ Residual Value - accounted for prospectively.
8. If used asset is purchased then the useful life of asset given under schedule II to
be reduced by life of asset that is already consumed / used.
9. First time adoption of Schedule II:
Schedule II was made effective on 01/04/2014 and was applied retrospectively
with adjustments made from carrying amt of PPE and opening reserves (subject
to DTA/DTL)

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10. Extra Shift Depreciation :

Fixed Asset
(Plant & Machinary category)

Continuous Others
process plant*
Others (extra shift
No extra shift depreciation
depreciation)
Separate useful
life / Depreciation Extra depreciation for
rates. number of days running extra
Even if assets used extra
shift to be charged.
shift, no additional
a)Double shift: + 50 %
depreciation is charged.
.in b)Triple shift: + 100 %
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*Continuous process plant is designed due to the nature of process, to run

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continuously i.e. in all 3 shifts.

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Because It involves substantial time & cost to shut down & then start up.

Note:
1. ICAI has issued ‘Guidance Note on Accounting for Depreciation under Companies
Act, 2013’.
2. With depreciation now based on useful life & RV prescribed by schedule II, any
change in life/ residual value etc. will lead to change in depreciation rate (%)
Hence, schedule II promotes dynamic depreciation rates (%)

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