IAS- 16: Property, Plant and Equipment

Source:
1. Ind AS – 16: Property, Plant and Equipment
2. IAS – 16: Property, Plant and Equipment
Objective of this Standard
The principal issues in accounting for property, plant
and equipment (i.e., Fixed Assets) are,
1. Recognition of assets,
2. Determination of carrying amount in initial
recognition and subsequent measurements,
3. Depreciation charges
4. Impairment losses to be recognized
5. Derecognition and disclosures
 Scope
This Standard applies to accounting for property, plant
and equipment except,

a. Property, plant and equipment classified as held for

sale,
b. Biological assets related to agricultural activity,
c. Mineral rights and mineral reserves, etc.

However, PPE used to develop and maintain the last

two categories are considered as PPE.
 Definitions
1. Property, Plant and Equipment: These are tangible
assets which are held for use in the production or
supply of goods and services, for rental to others, or
for administrative purposes. They are expected to be
used for more than one accounting period.
2. Depreciable Amount: Cost of an asset, or other
amount substituted for cost in the financial statements,
less its residual value.
3. Cost: Amount of cash and cash equivalents paid; or
fair value of other consideration given to acquire an
asset at the time of its acquisition or construction.
4. Fair Value: Amount for which an asset could be
exchanged between knowledgeable and willing parties
in an arm’s length transaction.
 Definitions (contd)
5. Residual Value: Net amount which the entity expects
to obtain for an asset at the end of its useful life after
deducting expected costs of disposal.
6. Carrying Amount: Amount at which an asset is
recognized in the balance sheet after deducting
accumulated depreciation and accumulated impairment
loss.
7. Useful Life: The period of time over which the asset is
expected to be used by the firm or by number of
production units to be obtained from the assets.
8. Impairment Loss: Excess of carrying amount of an
asset over recoverable amount.
 Initial Recognition – Criteria
When an organization incurs expenses for
acquisition or construction of an asset, the
related cost is recognized as an asset provided
the following conditions are fulfilled.
a. It is probable that future economic benefits
associated with the asset flow to the
enterprise, and
b. The cost of the asset can be reliably
measured –both initial costs and subsequent
costs.
 Initial Measurement
Initially, PPE are measured at cost which includes,
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 such as,
1. Employee benefit costs,
2. Site preparation cost,
3. Initial delivery and handling costs,
4. Installation and assembly cost,
5. cost of testing (net of sale proceeds of any goods produced in the testing
process),
6. Professional fees, etc.,
c. The initial estimate of the costs of dismantling and removing the item
and restoring the site.
d. When an item of PPE is acquired and payment is deferred beyond
normal credit terms, the difference between total payments made
and cash price equivalent should be recognized as interest and
capitalized.
 Initial Measurement (contd)
However, the following items of cost are not
included in the cost of PPE.
a. Costs of opening a new facility,
b. Cost of introducing new product or service –
i.e., promotional costs of the produce but not
of the asset,
c. Costs of conducting business in a new
location or with a new class of customers,
d. Administrative and other general overheads,
and
e. Staff training costs.
 Exchange Transactions –
Initial Recognition
When an item of PPE is acquired in
exchange of one or more monetary items,
a. The initial cost of the asset acquired is
measured at fair value of the asset
acquired.
b. If fair value of the asset acquired cannot
be measured, then the carrying cost of
the asset given up is taken.
 Measurement subsequent to Initial Recognition
PPE is measured either applying Cost Model or
Revaluation Model in subsequent measurement.

a. Under Cost Model, the asset is carried at cost

less accumulated depreciation and
accumulated impairment losses.

b. Under Revaluation Model, the PPE is

carried at revalued amount (i.e., fair value)
less accumulated depreciation and
accumulated impairment losses
 Subsequent Costs
Subsequent costs are those costs which are incurred
after the initial costs are measured and recognized.
These are costs incurred while the asset is already in
operation.
Subsequent costs should be added (i.e., capitalized)
to the carrying amount of PPE only when,
a. It is probable that future economic benefits, in
excess of originally assessed standard of
performance of the existing asset, flow to the
entity.
b. All other subsequent expenses shall be
recognized as expense in the period in which
they are incurred.
 Spare Parts and Stand-by Equipment
1. Major components of an asset require replacement at a
regular internal. If these items are initially recognized as
separate asset, then such replacement shall be treated as new
acquisition, and therefore, recognized as assets applying the
recognition criteria.

2. Most spare parts and servicing equipment are usually carried

to inventory and expensed when used.

3. However, major spares and stand-by equipment which are

expected to be used for period over more than one
accounting period should be recognized as PPE and
depreciate over their useful lives.
4. In case the spare parts and servicing equipment can be used
only in connection with a particular item of PPE, they are
accounted for as PPE and are depreciated over a period not
exceeding the useful life of the related asset.
 Revaluation
1. When the fair value of an asset differs materially
from its carrying amount, revaluation is required.
2. The frequency of revaluations depends upon the
changes in fair values of the items of PPE.

3. Some items of PPE experience significant and

volatile changes in fair value necessitating annual
revaluation.

4. For items of PPE with only insignificant changes in

fair value, it may be sufficient to revalue them only
once in three to five years.
 Revaluation (contd)
If an item of PPE is revalued, the entire class of PPE to which
that asset belongs should be revalued. The items within a class of
PPE are revalued simultaneously to avoid selective revaluation
of assets and the reporting of amounts in the FSs that are a
mixture of costs and values as at different dates. A class of PPE
is a grouping of assets of a similar nature and used in an entity’s
operations. The following are examples of separate classes.
1. Land - no depreciation
2. Land and buildings – cost should be split, and depreciation
only on buildings,
3. Machinery,
4. Ships,
5. Aircraft,
6. Motor vehicles,
7. Furniture and fixtures,
8. Office equipment, etc.
 Revaluation (contd)
1. A class of assets may be revalued on a rolling basis
provided revaluation of the class of assets is completed
within a short period and provided the revaluations are
kept up to date.
2. If an asset’s carrying amount is increased as a result of a
revaluation, the increase should be recognized in Other
Comprehensive Income and accumulated in Equity
under the head, Revaluation Surplus. However, the
increase should be recognized in Profit or Loss to the
extent that it reverses a revaluation decrease of the same
asset previously recognized in Profit or Loss.
3. If an asset’s carrying amount is decreased as a result of
a revaluation, the decrease should be recognized in
Profit or Loss. However, the decrease should be
recognized in other Comprehensive Income to the
extent of any credit balance existing in the revaluation
surplus in respect of that asset.
 Depreciation Charge – Some Highlights
1. Depreciation is a systematic allocation of
depreciable amount over the useful life of the asset.
2. If the residual amount of the asset exceeds the
carrying amount, there shall be no depreciation.
However, depreciation charge will resume when
the residual amount becomes less than the carrying
amount.
3. Depreciation charge ends when the asset is
classified as held for sale or derecognized.
4. Depreciation charge does not cease when the asset
remains idle or retired from active use unless the
depreciable amount is zero.
 Depreciation Charge – Some Highlights (contd)
5. Depreciation method used shall reflect the pattern in
which the asset’s future economic benefits are
expected to be consumed by the company.
6. The entity may use either Straight Line Method or
Diminishing Balance Method or Units of
Production Method.
7. The method used should reflect the pattern of
consumption and it shall be used consistently.
However, if there is a change in the pattern, the
Depreciation Method shall be changed.
8. Depreciation charge for each period shall be
recognized as an expense in the Profit or Loss.
Derecognition (i.e., Retirements and Disposals) of
PPE
1. An item of PPE should be de-recognized (i.e.,
eliminated from the Balance Sheet) when no
further economic benefit is expected to be
derived from such asset.

2. Gains or losses arising on de-recognition

shall be recognized in the Profit or Loss.
Gain = [Net Sale Proceeds – Carrying Amount]

Loss = [Carrying Amount – Net Sale Proceeds]

 Disclosure
The FSs shall disclose, for each class of PPE,
a. The measurement bases used for determining the gross
carrying amount,
b. The depreciation methods used,
c. The useful lives and the depreciation rates used,
d. The gross carrying amount and the accumulated depreciation
(aggregated with accumulated impairment losses) at the
beginning and end of the period, and
e. A reconciliation of the carrying amount at the beginning and
end of the period showing,
1. Additions,
2. Assets classified as held for sale,
3. Acquisitions through business combinations,
4. Increases or decreases resulting from revaluations and
from impairment losses, etc.
Illustration – 4.1: ABC Company acquired
a machine for ` 25,00,000. For the purpose
of bringing the machine from the supplier’s
place to its plant, ABC incurred shipping
cost amounting to ` 80,000. Further, the
company incurred an additional
expenditure relating to testing and
preparation of the machine for its use and
this amount comes to ` 30,000. Determine
the cost of the machine at which it shall be
recorded in the books of accounts of ABC
Company.
Illustration – 4.2: LN Company Limited
purchased a machine for ` 20,00,000 during
2006-07. And an amount of ` 2,00,000 is
still due to the seller of the machine.
However, during 2009-10, the seller waived
off the balance amount. And LN Company
considered the waived off amount as its
income. Accordingly, LN Company
credited the same to its Profit and Loss
Account for 2009-10. Is it the sound
accounting treatment? Why?
Illustration – 4.3: A company purchased a plant for a
gross price of ` 20 crores. The seller granted 0.5% rebate.
The gross price includes excise duty of ` 2 crores for
which the buyer-entity will get tax refund and non-
refundable VAT of ` 1.8 crores. It has also incurred ` 1.5
crores for transportation costs, handling charges and
insurance, ` 0.5 crore for installation and ` 0.3 crore for
testing and professional fees. It has earned ` 2 lakhs from
selling goods produced out of testing. The company
borrowed ` 10 crores for financing the new purchase at
10%. The entire process of purchase till the plant became
operational took nearly 15 months. borrowings were
outstanding during this period. the company earned ` 1
lakh 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?
Illustration – 4.4: X company was constructing a plant. The construction work
continued for a period of 15 months and then it carried out 3 tests before the
experts declared the plant ready for commercial production which took another 3
months. However, the plant remained idle for another 3 months for finalizing
supply chain like sourcing raw material, transportation and warehousing of raw
material and finished goods. The company incurred the following expenses.
a. Purchase of machinery and other spares: ` 30 crores which includes refundable
taxes of ` 1 crore.
b. Transportation, handling and insurance: ` 1 crore.
c. Employee benefit costs (included in the employee benefit cost of the entity as
a whole): ` 5 crores.
d. Overhead: ` 3crores.
e. General management expenses: ` 1 crore (entity allocated a portion of general
management expenses based on the estimate of time devoted by the senior
executives).
f. Money borrowed for funding the construction of the plant: ` 20 crores at 10%
p.a. The entity intends to capitalize 21 months interest.
g. Hire charge for construction assets: ` 1 crores.
h. Depreciation on owned assets used in construction: ` 0.8 crore.
i. Staff training expenses: ` 5 lakhs.
j. Promotional expenses for launching new product out of the plant: ` 0.5 crore.
Find out the initial cost of the plant.
Illustration – 4.5: Gross carrying
amount of plant and machinery is
`10 crores and the accumulated
depreciation is ` 2 crores. It is found
that the market value of the asset is `
12 crores in its second hand
condition.
Determine the revaluation surplus or
loss.
Illustration – 4.6: A company provides the
following details on the revaluation of PPE.

Initial Cost / Accumula- Revalua- Revalua-

Deprecia-
Revalued ted Depre- tion tion
Year tion
Amount (` ciation to (` Loss (` Profit (`
(` lakhs)
lakhs) lakhs) lakhs) lakhs)
2009 1,000 100 200 0 200
2010 1,200 120 320 0 0
2011 1,200 120 440 300 0

The CFO of the company was wondering if he

can adjust the revaluation loss against the
previous revaluation profit.
Illustration – 4.7: A company provides the
following details on the revaluation of PPE.

Initial Cost / Accumula- Revalua- Revalua-

Deprecia-
Revalued ted Depre- tion tion
Year tion
Amount (` ciation to (` Loss (` Profit (`
(` lakhs)
lakhs) lakhs) lakhs) lakhs)
2009 1,000 100 200 200 0
2010 1,200 120 320 0 0
2011 1,200 120 440 0 300

The CFO of the company was wondering if he

can adjust the revaluation loss against the
previous revaluation profit.
Illustration – 4.8: On 1st March, 2010, MNP
Company acquired a piece of land for ` 8 crores for
the purpose of constructing factory buildings. MNP
demolished old buildings on the site and sold the
materials it recovered from demolition for a price of `
4 lakhs. Further, the following expenses were incurred
by MNP during March 2010 in connection with the
site acquired.
a. Cost of demolition of old buildings: ` 10 lakhs
b. Registration fee: ` 80 lakhs
From the above, determine the amount at which the
Land Account should be shown in the Balance Sheet
as on March 31, 2010
Illustration – 4.9: The details relating to the
construction of a building are presented below. From
these details, determine the cost of fixed asset.
Amount
Particulars
(` lakhs)
Cost of materials 35
Total labour cost for the year (20% of the labour cost pertains to the 90
building)
Other direct expenses 13
Total administrative overhead expenses for the year (1/10th is
attributable to the building) 80
Depreciations on other assets used for the construction of the 3
building
Illustration – 4.10: Comment and give your
views on the following.

A company has made additions to its factory

buildings by its own workmen at a cost of `
4,50,000 for wages and materials. The lowest
estimate from an outside contractor to carry
out the same work was for ` 6,00,000. The
directors contend that as they were fully
entitled to employ an outside contractor, it is
reasonable to debit the factory building
account with ` 6,00,000. [CA (Inter), November 2001]
Illustration – 4.11: MNP Company
Limited allots 25,000 equity shares to the
seller of a second-hand imported machine
whose fair market value is estimated at `
30,00,000. MNP is a listed company and
its equity shares are traded at ` 120 per
share. However, the face value of equity
shares is only ` 10 per share.
Determine the cost of the machinery for
capitalization purpose.
Illustration – 4.12: ABC Company
Limited acquired a new machine for a price
of ` 15,00,000. The purchase consideration
is settled fully through the issue of 12,000
equity shares of ` 100 each fully paid.
Since ABC is not a listed company, the
information about the market price of its
equity shares is not available.
State the amount at which the machine
should be recorded in the books of accounts
of ABC Company Limited.
Illustration – 4.13: A publishing
company undertook repair and
overhauling of its machinery at a cost
of ` 2.50 lakhs to maintain them in
good condition and capitalized the
amount as it is more than 25% of the
original cost of the machinery.
As an auditor, what would you do in
the following situations? [CA (Inter), November 2002]
Illustration – 4.14: Due to fire in the factory, the plant
and machinery got damaged. The estimated cost of
repairs was nominal i.e., ` 5,000.
However, a suggestion was received that if the design
of the plant and machinery, during such repair shut
down, could be modified, the production would
increase substantially. The cost of such repairs
together with modification suggested was ` 1 lakh.
The suggestion was accepted and Rs.1 lakh spent for
the said purpose.
The company charged the entire expenses to Profit and
Loss Account. Do you agree with the company’s
treatment? If not, state your views.
Illustration – 4.15: Your client has sought
your opinion to correctly account for and/or
disclose the following matters. State your
views with reasons for the same.

The value of land and building was not

separately disclosed. Also a major repair
of the roof amounting to ` 1,00,000 was
carried out during the year without which
the building would have become
unusable.
Illustration – 4.16: As a Statutory Auditor, how
would you deal with the following?

A machinery costing ` 1 lakh and presently

having book value of ` 20,000 is not put to
active use by the company for various reasons.
The machinery has been identified for disposal
and is reasonably expected to realize ` 5,000 on
sale. Pending the disposal, in the balance sheet
as on 31st March, 2011, the said machinery
stands included with other plant and machinery
and shown at book value.[CA (Final), November 2002]
Illustration – 4.17: XYZ Company Limited acquired a
machine for ` 15,00,000 eight years ago and the useful life of
the machine so acquired was estimated at 10 years with an
estimated scrap value at 5% of the purchase price. Straight-
line Method is followed by the company to determine and
charge depreciation on this machine.

However, after its use for 8 years, the company

found the machine has become obsolete and
assessed as useless. The net realizable value of the
machine is estimated at ` 2,50,000.

Determine the amount of loss or gain on the

retirement of the machine.
Illustration – 4.18: On 1st January, 2010, ABC Company acquired
production equipment for ` 2,50,000. The following further costs were
incurred.
a. Delivery: ` 23,500
b. Installation: ` 24,500
c. General administration costs of an indirect nature: ` 3,000
The installation and setting-up period took 3 months, and a further
amount of ` 21,000 was spent on start-up costs directly related
to bringing the asset to its working conditions.
The equipment has an estimated useful life of 14 years and a residual
value of ` 18,000.
a. What value is originally recorded as the historical cost of the
assets?
b. What is the annual charge in the income statement related to
the consumption of the economic benefits embodied in the
assets?
c. The company adopted straight line depreciation. The asset
was sold on 1st January, 2012 for ` 3,05,500. Find out gain or
loss on de-recognition.