Ind AS 16

Property, Plant And Equipment

Ind AS Workshop
(Organised by YMEC of ICAI)
Hotel Kempinski, Vishwas Nagar
July 26, 2015
Applicable Guidance
• AS 10: Accounting for Fixed Assets
IGAAP • AS 6 : Depreciation Accounting
• Schedule II of the Companies Act, 2013

• Ind AS 16 : Property, Plant and Equipment

• Appendix A : Change in existing decommissioning,
Ind AS Restoration and Similar Liabilities
• Appendix B : Stripping cost in the production
phase of a surface mine

• IAS 16 : Property, Plant and Equipment

• IFRIC 1: Change in existing decommissioning,
IFRS Restoration and Similar Liabilities
• IFRIC 20 : Stripping cost in the production phase
of a surface mine
Session Take Away
• Scope and Definition of PPE
• Recognition and Measurement
• Componentisation
• Inspection and Overhauls
• Deferred Payment Terms
• Decommissioning and Site
restoration cost

• Revaluation – Fair Value

• Determination of carrying
amount
• Depreciation charges
• Impairment losses
• Ind AS Vs IGAAP
• Carve Outs
Objectives of Ind AS 16
• Prescribe the accounting treatment for PPE
• Recognition of the assets
• Determination of carrying amount
• Depreciation charges
• Impairment losses
Basic Asset Life Cycle
Property, Plant Equipment
Ind AS 16 applicable to all kinds of PPE except

Ind AS • PPE classified as held for sale

105

• biological assets related to agricultural activity

Ind AS 41

• the recognition and measurement of exploration

Ind AS 106 and evaluation assets

• mineral rights and mineral reserves such as oil,

natural gas and similar non-regenerative resources

This Standard will be applicable to property, plant and equipment which are
used to develop or maintain the above assets.
Definition of PPE
Held for use in
production or
supply of goods
or services Expected to
Tangible used during
items more than one
period

PPE
AS 10 (IGAAP)
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.
Recognition criteria
Probable that
future economic Cost can be
benefits will measured
flow to entity reliably

Recognition
of cost as
an asset
(PPE)

AS 10 (IGAAP)
- No Such specific recognition criteria.
- Item which meet the definition of fixed asset will be recognised as a fixed asset
 Spare parts or Servicing equipment
Normally treated as inventory and expensed
off as consumed

Major spare parts and stand-by equipment expected to

be used during more than one period are treated as
PPE. (if they meet the definition of PPE as per Ind AS 16)

Depreciated over the useful life of the main

assets to which it relates.

AS 10 (IGAAP) - Spare parts are capitalised, if they can be used only in connection with a fixed
asset and whose use is expected to be irregular.
Component Accounting
Separation of an asset into its significant
components

- Significant Cost of a part in proportion to

total cost
- May have different useful life.

IGAAP
Para 8.3 of AS 10 only touch upon on this issue
and states that Accounting for FA may be
improved if total cost thereof is allocated to its
various parts.
Component Accounting
The Companies Act, 2013
Mandatory as per Schedule II of the CA 2013
from April 1, 2015. (Voluntary for 2014-15)

Bridges the gap under converged IFRS and

Existing Scenario for this requirement.

Imapct of moving
to new regime of
Ind AS ??
 Residual Useful
SHIP: MV SANTA CLAUS Allocated cost value life Depreciation

Keel 120,000,000 6,000,000 25 4,560,000

Bridge 70,000,000 10,500,000 25 2,380,000

Anchor windlass with chains 20,000,000 2,000,000 25 720,000

Bulkhead 90,000,000 9,900,000 20 4,005,000

Propulsion system 30,000,000 3,000,000 20 1,350,000

Decks 100,000,000 5,000,000 15 6,333,333

Boiler 10,000,000 1,000,000 15 600,000

Hydraulic crane 30,000,000 7,500,000 15 1,500,000

Turbine generator 20,000,000 1,000,000 15 1,266,667

Bow thruster 20,000,000 2,000,000 12 1,500,000

Refrigeration system 20,000,000 4,000,000 11 1,454,545

Fresh water generator 10,000,000 1,000,000 11 818,182

Life raft 10,000,000 1,000,000 10 900,000

Others 50,000,000 5,000,000 10 4,500,000

13 f 16 (revised): Plant Property & Equipment 600,000,000 58,900,000 31,887,727

Subsequent Costs
• Same criteria followed as of initial recognition.
• Probable that future economic benefits will flow
and cost can be measured reliably.
• Day to day servicing cost which includes labour
and consumables needs to be expensed off
• It can be in the form of followings:
- Replacement Cost
- Inspection Cost etc.
AS 10 (IGAAP) – Subsequent expenditures relating to an item of Fixed Assets should be added
to its Book value only if they increase the future benefits from the existing asset beyond its
previously assessed standard of performance.
Subsequent costs - Major inspections or
overhauls

 Overhaul costs may involve three elements; Inspection,

Replacement of parts and Major Maintenance.

 Cost of major inspection is recognised as PPE if it meets the asset

recognition criteria.

 Any remaining carrying amount relating to the previous

inspection is derecognized irrespective of whether previous
inspection was separately identified and depreciated.
Case Study
Uddan Ltd buys an aircraft for 90 Lakhs. Under civil aviation rules, the
aircraft requires a major inspection every three years at a cost of 5 lakh.
Three year after purchase it undergoes its first major inspection. The cost in
relation to this inspection amounting to 7 Lakhs.

Explain how the same should be accounted for in accordance with

the requirements of Ind AS 16?
Solution
The original carrying value would have been allocated as follows:-

Aircraft + Cost of Inspection = 85 Lakhs + 5 Lakhs = 90 Lakhs

Para 14 of Ind AS 16 provides that in such case Original cost of inspection is

derecognised and the new inspection cost will be recognised in the carrying
amount. So, New inspection cost will be accounted for as an asset addition
and the original cost as an asset disposal.

Gross Block
Aircraft = 85 Lakhs
Inspection Component = Original Cost of Inspection (-)derecognition
of original inspection+ New inspection Cost
= +5 Lakhs - 5 Lakhs + 7 Lakhs = 7 Lakhs
Measurement at initial recognition

At cost only

Purchase price –
including Import Costs of dismantling
duties and non and removing the item
refundable taxes and restoring

Directly attributable
costs for bringing the
asset
Examples of directly attributable costs
Costs of testing whether the asset is working properly after
deducting proceeds from sale of any product produced during
the testing period

Installation and assembly Costs of site

costs preparation

Initial delivery and Cost of employee

Professional fees
handling costs benefits
Examples of not directly attributable costs

Costs of
conducting
business in a Administration
new location Costs incurred and other
Costs of
or with a new in introducing general
opening a new
class of a new product overhead
facility
customer or service costs
(including
costs of staff
training)
Deferred Payment credit
(Paragraph 23 and 72 of Ind AS 16)

• Cost of an item of PPE is the cash price equivalent at the

recognition date.

• In case payment is deferred beyond normal credit terms:

Difference between the cash price equivalent and total
payment is recognised as interest over the period of
credit unless such interest is capitalised.

IGAAP
Existing AS 10 does
not contain this
requirement.
 Decommissioning cost

Cost towards
dismantling and Corresponding
removing the obligation
asset and recognised as a
restoring the provision under
original site after Ind AS 37
use

For example :
building an Typically arise in
additional internal oil and gas,
wall with condition
that property will be
mining and
returned in original electricity
state at the end of industries
lease
IGAAP
Existing AS 10 does
not contain this
requirement.
Measurement subsequent to Initial
recognition

• Can choose either Cost model or Revaluation model

as its accounting policy

• Accounting policy should be applied to the whole of

a class of property, plant and equipment and not
merely to individual assets within a class.
Cost model

accumulated
Accumulated Carrying
Cost depreciation
impairment
Amount
losses
Revaluation Model
 After initial recognition, PPE to carried at revalued amount, being its fair value
at the revaluation date.

Revalued Subsequent
Subsequent
Amount on accumulated Carrying
accumulated
the date of impairment Amount
depreciation
revaluation losses

If a single item of PPE is revalued, then the entire class of PPE to which that
item belongs should be revalued.

Class of assets : a grouping of assets of a similar nature and use in an entity’s

operations
 At sufficient regularity such
that the carrying amount
does not differ materially
from the fair value

Valuations need not to be Where movement in fair

performed every year or values are volatile and
every reporting period significant-frequent
revaluation
Otherwise- every 3-5 years

Frequency
of
revaluations IGAAP (AS 10)
- Systematic basis
Imapct of moving selection
to new regime of - No guidance on FV &
Ind AS ?? frequency of revaluation
Revaluation gains and losses
First Time

Increase Decrease

Debit the Asset Debit P&L account

Credit the Revaluation

reserve Credit the asset

Subsequent

Increase in value Decrease in value

Increase in value Decrease in value

Charged to P&L to the

Debit to reserve and extent of earlier debit
Credit to Reserve and Surplus to the extent to P&L, Balance to Charged to P&L
Surplus balance available and Revaluation Reserve account
remaining to P&L
Depreciation

The depreciable amount of an asset

should be allocated on a systematic basis
over its useful life.

Depreciation charges should be recognised as an

expense unless they are included in the carrying
amount of another asset.
 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
• Depreciation is charged till point, residual value is greater
than and equal to carrying amount.

• Depreciation ceases when an asset is derecognized or

held for sale under Ind AS 105.
• Depreciation does not stop automatically when an asset
is idle.
Method of depreciation
The depreciation method adopted should reflect the
pattern in which the asset’s future economic benefits
are expected to be consumed by the entity.

If there is significant change in expected pattern of

consumption ,method of depreciation to be changed in
lines with the future benefits.

Method changes are accounted for as a change in an

accounting estimate. (Ind AS 8)

The method should result in a depreciation charge

throughout the asset's useful life and not just towards the
end of its useful life or when the asset is falling in value.
 Change in estimate of useful life and residual
value
Useful life and residual value are to be reviewed at every year
end.

If there is any change in Useful life/ RV, the same is treated as

IGAAP (AS 6)
changes in estimates and accounting will be done
- Useful life MAY be prospectively.
reviewed periodic

- Change in depn
method will be
treated as change in
Future annual depreciation will be revised basis the new
accounting policy. useful life.

The method should result in a depreciation charge throughout

the asset's useful life and not just towards the end of its useful
life or when the asset is falling in value.
Carve Out in Ind AS 101
Use of carrying cost of Property, Plant and Equipment on the date of
transition of First-time Adoption of Ind AS is permitted

IFRS 1 : Items of Property, Plant and Equipment shall be determined by

applying IAS 16 retrospectively or the same should be recorded at fair value
on the date of transition.

In case of old companies retrospective application of Ind AS 16 or fair values

at the date of transition to determine deemed cost may not be possible for
old assets.

Accordingly, Ind AS 101, First-time Adoption of Ind AS, provides relief that
an entity may use carrying values of all items of PPE on the date of
transition in accordance with previous GAAP as an acceptable starting point
under Ind AS.
Disclosures
• The measurement bases (for example cost or revaluation)
• The depreciation methods used (for example, straight-line
method or declining balance method).
• The useful lives or the depreciation rates used.
• The gross carrying amount (cost or revalued amount) at
both the beginning and end of the period.
• A reconciliation of the carrying amount at the beginning and
end of the period separately disclosing:
- Additions
- Acquisitions through business combinations.
- Revaluation increases or decreases.
• Existence and amounts of restrictions on title and property,
plant and equipment pledged as security for liabilities.
Ind AS Vs IGAAP – some key differences
Property, Plant I GAAP Ind AS
and Equipment
Component Para 8.3 of AS 10 just touch Ind AS 16 mandates
Approach upon that the accounting for an component accounting. Under
item of fixed asset may be this approach, each major part
improved if the total exp there of an item of PPE with a cost
on is allocated to its component that is significant, is
parts depreciated separately.
Cost of major Generally expensed when Capitalized only when it is
inspections and incurred probable that it will give rise to
overhauls. future economic benefits

Asset dismantle, No specific reference except AS Present value of such cost, the
removal or 29 regarding the provision obligation of which an entity
restoration cost incurs as a consequence of
installing the item, is included
as part of the cost of PPE.
Property ,plant I GAAP Ind AS
and equipment
Revaluation Revaluation is permitted. No Revaluation is required to be
specific requirement on carried out at sufficient
frequency of revaluation. regularity.

Selection of asset for

revaluation to be made on If revaluation model is adopted,
systematic basis (eg. a unit the entire class of PPE has to be
and not entire class) revalued.
Depreciation Earlier depreciation needs to Depreciation to be calculated
Method be charged as per schedule based on Useful life
XIV of CA, 1956 but as per
Schedule II of CA 2013
depreciation is to be
calculated as per useful life
and the same has been
specified in it.
Property ,plant I GAAP Ind AS
and equipment
Change in Treated as change in Treated as change in accounting
depreciation accounting policy estimate
method

Reassessment of No specific requirement Reassessed at each balance

depreciation sheet date.
method, useful
life, and residual
value
Deferred payment No specific guidance Difference between the
terms under AS 10 for Assets purchase price under normal
acquired on deferred credit terms and the amount
settlement terms. paid, is recognised as interest
expense over the period of the
Generally financing financing.
element is not separated
Case Study
AG Engineering Ltd has purchased a new item of manufacturing
machinery for their industrial printing operation.
It is a RTX 3000 printing press, which has been imported from an
overseas supplier and will be transported from the docks to the
factory by a convoy of heavy vehicles due to its large size and weight.
The asset will be installed in the existing factory following the
dismantling and removal of the old press, which is now obsolete
owing to advances in technology.

Determine if the following costs can be added to the invoiced

purchase price and included in the initial recognition of the cost of
the asset
State whether following cost should be Included or Excluded in Include/
PPE :- Exclude
1 A trade discount received of 5 % of the purchase price of the asset
Include

2 VAT paid on the purchase

Exclude

3 Interest paid on a short term loan taken to provide the necessary

cash for payment of the purchase price Exclude

4 Import duties paid

Include

5 Shipping costs and cost of road transport

Include
6 Insurance for the shipping
Include

7 An economic development rebate from the state

Include
State whether following cost should be Included or Excluded in Include/
PPE :- Exclude
8 Cost of laying a new concrete slab and installing special rubber
mounted footings for the new press in order to reduce vibration Include
during use
9 Hire of a crane to transfer the press from the vehicles into the
factory Include

10 Costs associated with removing a section of the factory roof to

allow the machine to be dropped into place and subsequently Include
refitting the roof
11 Cost of installing soundproofing in the roof at the same time in
order to provide protection for workers in other parts of the Exclude
factory building
12 Professional fees charged by consulting engineer for overseeing
Include
the installation process
13 Electricians fees for connecting the press to the power supply
Include

14 A portion of the operating costs (salaries, office expenses) of the

purchasing department Exclude
State whether following cost should be Included or Excluded in Include/
PPE :- Exclude
15 Costs of materials (papers and inks) used in calibrating the
machine and setting it up for operation Include

16 Costs of training the operators of the new machine

Exclude

17 A portion of the inefficiencies in production for the first month of

use while the operators became comfortable with using the Exclude
machine
 Thank You
Presented by :
Alok Kumar Garg
CA, CS, CIFRS (ICAI), B.Com (Hons.)

dial - 999 999 1543

email - caalokgarg@gmail.com