NAS 16 Property,

Plant and
Equipment
CA SAUGAT GAUTAM
What is PPE ?

Tangible assets

Production or Supply of goods or services,

Held for use in For rental to others,
For administrative purposes

Expected to be used during more than one period

 This Standard does not apply to:

(a) property, plant and equipment classified as held for sale in

accordance with NFRS 5 Non-current Assets Held for Sale and
Discontinued Operations.

(b) biological assets related to agricultural activity other than bearer

plants (see NAS 41 Agriculture). This Standard applies to bearer
Scope plants but it does not apply to the produce on bearer plants.

(c) the recognition and measurement of exploration and evaluation

assets (see NFRS 6 Exploration for and Evaluation of Mineral
Resources).

(d) mineral rights and mineral reserves such as oil, natural gas and
similar non-regenerative resources.
Dog for security Dog for breeding
(NAS 16 PPE) (NAS 41 Agriculture)
Accounting Stages

Recognition Subsequent Derecognition

(Entry in Accounting (Exit from
Books) (Holding) Books)
Recognition Criteria
The cost of an item of property, plant and equipment shall be recognised as
an asset if, and only if:
(a) it is probable that future economic benefits associated with the item will
flow to the entity; and
(b) the cost of the item can be measured reliably.
 An item of property, plant and equipment
that qualifies for recognition as an asset
shall be measured at its cost.

Initial Cost is the amount of:

◦ cash or cash equivalents paid or
Recognition ◦ the fair value of the other consideration
given
to acquire an asset at the time of its
acquisition or construction
Elements of Cost
Purchase Price
•Add: Duties and Taxes (non-refundable)
•Less: Trade discounts and rebates
Directly attributable cost
•Costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of
operating in the manner intended by management (i.e., until ready for intended use). Examples:
- costs of employee benefits
- costs of site preparation
- initial delivery and handling costs
- installation and assembly costs
- costs of testing whether the asset is functioning properly after deducting the net proceeds from selling any
items produced while bringing the asset to that location and condition (such as samples produced when testing
equipment)
- professional fees
Dismantling Cost (Use Present Value)
•initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located,
the obligation for which an entity incurs either when the item is acquired or as a consequence of having used
the item during a particular period for purposes other than to produce inventories during that period.
 costs of opening a new facility
(pre-incorporation/preliminary costs)

costs of introducing a new product or service (including costs of

advertising and promotional activities)

Not the costs of conducting business in a new location or with a new class
element of of customer

cost (including costs of staff training)

administration and other general overhead costs

costs of relocating or reorganising part or all of an entity’s

operations
 Dismantling Cost
A Ltd. has estimated current site restoration expenses at NPR 5,00,000. Estimated rate of inflation is 6%
and risk-free rate is 10%. The estimated useful life of the project is 40 years. As on 2074-04-01, the date of
initial recognition, the company estimates that NPR 5,00,000 as the current cost of site restoration.
How this should be accounted as per NAS 16 ?
Answer:
Inflate 5 lakh to value after 40 years [Compounding at 6% inflation rate]
Discount that value to present day [Discounting at 10% risk free rate]
Entry:
PPE A/c ----- Dr. 1,13,631
To Provision for dismantling A/c 1,13,631
 Acquisition
Mode

Self- Business
Purchase Exchange Lease
construction Combination

Immediate NFRS 16 NFRS 3

Payment (RoU Asset) (Fair Value)

Deferred
Payment
Deferred Payment – Similar to
NAS 2

The cost of an item of property, plant and equipment is the cash price equivalent at
the recognition date.

If payment is deferred beyond normal credit terms, the difference between the cash
price equivalent and the total payment is recognised as interest over the period of
credit unless such interest is capitalised in accordance with NAS 23 Borrowing Costs.
Example
A Ltd. purchased a machinery with payment Rs.
58,32,000 being made at the end of 2nd year. The
cash price of the machinery as on today is Rs.
50,00,000. How shall A Ltd. record these
transactions ?
Solution
Calculation of Effective Interest Rate (EIR)

Present Value (PV) = Rs. 50,00,000

Future Value (FV) = Rs. 58,32,000

Rate of interest (r) = ?

We have,

FV = PV(1+r)n

58,32,000 = 50,00,000 (1+r)2

r = 8% (EIR)
 Amortisation Table
Opening Interest @ EIR 8% Payment Closing
Year
(a) (b) (c) (a+b-c)
1 50,00,000 4,00,000 - 54,00,000
2 54,00,000 4,32,000 58,32,000 -
Date Particulars L. Debit (Rs.) Credit (Rs.)
F.
Y-1 Machinery A/c ----------------------- Dr. 50,00,000
(begin)
Ignoring the
To Supplier A/c 50,00,000 effect of
depreciation
Y-1 (end) Interest expense A/c (SoPL) ------------Dr. 4,00,000 due to lack
To Supplier A/c 4,00,000 of adequate
information
Y-2 (end) Interest expense A/c (SoPL) ------------Dr. 4,32,000 in the
question
To Supplier A/c 4,32,000

Supplier A/c ----------------------------Dr. 58,32,000

To Bank A/c 58,32,000
Self-construction
The cost of a self-constructed asset is determined using the
same principles as for an acquired asset.

If an entity makes similar assets for sale in the normal

course of business, the cost of the asset is usually the same
as the cost of constructing an asset for sale (see NAS 2).

Therefore, any internal profits are eliminated in arriving at

such costs.

Similarly, the cost of abnormal amounts of wasted material,

labour, or other resources incurred in self-constructing an
asset is not included in the cost of the asset.
 Question
ABC Ltd. is constructing a fixed asset. Following are the expenses incurred on the construction:
Materials 10,00,000
Direct Expenses 2,50,000
Total Direct Labour 5,00,000
(1/10th of the total labour time was chargeable to the construction)
Total office and administrative expenses 8,00,000
(5% is chargeable to the construction)
Depreciation on the asset used for the construction of this asset 10,000
Calculate the cost of fixed asset.
Answer
Particulars Amount (Rs.)
Material 10,00,000
Direct Expenses 2,50,000
Direct Labour [5,00,000 x 1/10] 50,000
Directly attributable administrative costs 40,000
[8,00,000 x 5%]
Depreciation of asset used for construction 10,000
Total Cost 13,50,000
PPE acquired in
exchange of non-
monetary
consideration
(other than own
equity shares)
E XC H A N G E / B A R T E R

This Photo by Unknown Author is licensed under CC BY

 Machine is recognized at the amount
Machine
of cash paid.
Cash (what has been given up)

Machine is recognized at the amount

Machine
of value of old car.
Old Car (what has been given up)
 Is the Fair Value of asset given up
available/readily measurable?

Yes
No
Is the Fair Value of asset
Is the Fair Value of asset
acquired in exchange also
acquired available ?
available ?

Yes Yes
Check which fair value is more Cost = Fair Value of asset
clearly evident acquired

No No
Cost = Fair value of asset given Cost = Carrying amount of
up asset given up
Exchange
Transaction
If an entity is able to measure reliably the fair value of
either the asset received or the asset given up, then the
fair value of the asset given up is used to measure the
cost of the asset received unless the fair value of the
asset received is more clearly evident.

If fair value of neither asset given up nor asset received is

available, the carrying amount of the asset given up shall
be used to measure the cost of the asset received.
Question
(June 2016, Audit & Assurance)
A company has 10 vehicles with carrying amount of Rs. 5 crores.
The company has purchased a new machinery worth Rs. 8 crore
by exchanging with its 10 used vehicles and making further
payment of Rs. 2 crore in cash. The company management
derecognizes vehicles from its financial statements and
recognizes machinery at Rs. 7 crores (5 crores plus 2 crores).
Give your opinion as an auditor.
 Answer
Fair Value =
Rs. 8 crore
New Since the fair value of asset given up is not available,
machinery fair value of asset received is used as the cost of the
10 vehicles + asset received (i.e., Rs. 8 crore).
Cash
Machinery A/c ---- Dr. 8 crore
To Old Vehicles 5 crore
Fair Value = ?? To Cash 2 crore
To Gain on derecognition (SoPL) 1crore (b/f)
Subsequent Expenditure
Recognise subsequent expenditure
as asset if they meet the
recognition criteria.

Day-to-day repairs/servicing
are charged to profit or loss.
Commencement of Depreciation
An entity shall commence providing depreciation on depreciable asset from
the date when the assets have been ready for intended use irrespective of
whether the asset have been used during the year or not.

Ready for
intended use

Capitalisation Depreciation
stops begins
 Estimate
Depreciation
Useful life

Cost Residual Value

Fixed

Depreciation is the systematic allocation of depreciable amount of an asset over its useful life.

Depreciable amount = Cost – Residual Value

Terms
Useful life is:
(a) the period over which an asset is expected to be available for use by an entity; or

(b) the number of production or similar units expected to be obtained from the asset by an
entity.

The residual value of an asset is the estimated amount that an entity would currently obtain
from disposal of the asset, after deducting the estimated costs of disposal, if the asset were
already of the age and in the condition expected at the end of its useful life.
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. [Pattern of
consumption] – It is also an estimate. Hence, depreciation is an accounting
estimate.

The depreciation method applied to an asset shall be 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 shall
be changed to reflect the changed pattern. Such a change shall be accounted for as a
change in an accounting estimate in accordance with NAS 8.
Which method to
use ?
It is the choice of the entity based on the
pattern of consumption of the asset.
Method can be:
◦ Straight-Line Method
◦ Diminishing Balance Method
◦ Units of Production method
◦ Other appropriate/reasonable
 Accounting Treatment of
Depreciation
The depreciation charge for each period shall be recognised in profit or loss unless it is
included in the carrying amount of another asset.

Depreciation of Office Depreciation of Factory Depreciation of Crane used in

Building Building construction of building

Charged to P/L Charged to cost of inventory Charged to cost of building

[Allocation of Fixed [Directly attributable cost for the
Production OH] building under construction]
Componentisation
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.
Separate depreciation shall be charged if the
parts of an item of PPE have different useful
life or different pattern of consumption.
Replacement of a
component
When any of the component is replaced, carrying
amount of the replaced component (i.e., old
component) is derecognized and new component is
recognized.
Gain or loss arising on derecognition is charged to
profit or loss.
For this purpose, each of the significant components is
accounted like an independent asset. Each such
significant component is depreciated separately.
 Subsequent Measurement
F/Y end (Reporting Date)

Accounting Policy
At what amount will the PPE be reflected in SoFP ? choice
(Subsequent Measurement)

Cost Model Revaluation Model

Cost xxx Fair Value on the date of revaluation xxx
(-) Accumulated depreciation (xxx) (-) Subsequent Accumulated depreciation (xxx)
(-) Accumulated impairment (xxx) (-) Subsequent Accumulated impairment (xxx)
Carrying Amount xxx Carrying Amount xxx
 Example – Cost Model
Y-1 Y-2
Depn = Rs. 90,000 Depn = Rs. 90,000

Cost = Rs. 10,00,000 Cost 10,00,000 Cost 10,00,000

R.V. = Rs. 1,00,000 (-) Acc. Depn (90,000) (-) Acc. Depn (1,80,000)
Life = 10 years Carrying Amount 9,10,000 Carrying Amount 8,20,000

Depreciation(SLM)
= (10L – 1L)/10
= Rs. 90,000
 Example 1 – Revaluation Model
Depn = Rs. 90,000 Y-1 Depn = (Rs. 8,50,000 – 1,00,000)/9 =Rs. 83,333

Cost = Rs. 10,00,000 Cost 10,00,000

R.V. = Rs. 1,00,000 (-) Acc. Depn (90,000)
Life = 10 years Carrying Amount 9,10,000
Fair Value 8,50,000
Decrease in FV 60,000

Revaluation Loss (P/L) A/c – Dr. 60,000

To PPE 60,000
SoFP
PPE 8,50,000
 Example 2 – Revaluation Model
Depn = Rs. 90,000 Y-1 Depn = (Rs. 10,00,000 – 1,00,000)/9 = Rs. 1,00,000

Cost = Rs. 10,00,000 Cost 10,00,000

R.V. = Rs. 1,00,000 (-) Acc. Depn (90,000)
Life = 10 years Carrying Amount 9,10,000
Fair Value 10,00,000
Increase in FV 90,000

PPE A/c – Dr. 90,000

To Revaluation Reserve (OCI) 90,000
SoFP
R.R. 90,000 PPE 10,00,000
 Example 1 Continued……
Y-1 Y-2
Depn = (Rs. 8,50,000 – 1,00,000)/9 =Rs. 83,333

Cost 10,00,000 Fair Value previous 8,50,000

(-) Acc. Depn (90,000) (-) Subsequent Acc. Depn (83,333)
Carrying Amount 9,10,000 Carrying Amount 7,66,667
Fair Value 8,50,000
Decrease in FV 60,000
What if ?
Revaluation Loss (P/L) A/c – Dr. 60,000 Case – I : Fair Value today is Rs. 7,50,000
To PPE 60,000 Case – II : Fair Value today is Rs. 8,00,000
Case – III: Fair Value today is Rs. 8,50,000
SoFP
PPE 8,50,000
Case – I : Fair Value today is Rs. 7,50,000
Decrease in FV (compared to Carrying Amount) = 7,66,667 – 7,50,000
= Rs. 16,667
Revaluation Loss (P/L) A/c – Dr. 16,667
To PPE 16,667

Case – II : Fair Value today is Rs. 8,00,000

Increase in FV (compared to Carrying Amount) = 8,00,000 – 7,66,667

= Rs. 33,333
PPE A/c – Dr. 33,333
To Gain on Revaluation (P/L) 33,333 [Gain recognized to the extent of loss previously recognized]
Case – III: Fair Value today is Rs. 8,50,000

Increase in FV (compared to Carrying Amount) = 8,50,000 – 7,66,667

= Rs. 83,333
PPE A/c – Dr. 83,333
To Gain on Revaluation (P/L) 60,000 [Gain recognized to the extent of loss previously recognized]
To Revaluation Reserve (OCI) 23,333 [Increase in excess of loss previously recognized]
 Example 2 Continued……
Y-1 Depn = (Rs. 10,00,000 – 1,00,000)/9 = Rs. 1,00,000 Y-2

Cost 10,00,000 Fair Value previous 10,00,000

(-) Acc. Depn (90,000) (-) Subsequent Acc. Depn (1,00,000)
Carrying Amount 9,10,000 Carrying Amount 9,00,000
Fair Value 10,00,000
Increase in FV 90,000
What if ?
PPE A/c – Dr. 90,000 Case – I : Fair Value today is Rs. 9,50,000
To Revaluation Reserve (OCI) 90,000 Case – II : Fair Value today is Rs. 8,40,000
Case – III: Fair Value today is Rs. 8,00,000
SoFP
R.R. 90,000 PPE 10,00,000
Case – I : Fair Value today is Rs. 9,50,000
Increase in FV (compared to Carrying Amount) = 9,50,000 – 9,00,000
= Rs. 50,000
PPE A/c – Dr. 50,000
To Revaluation Reserve(OCI) 50,000

Case – II : Fair Value today is Rs. 8,40,000

Decrease in FV (compared to Carrying Amount) = 9,00,000 – 8,40,000

= Rs. 60,000
Revaluation Reserve (OCI) A/c – Dr. 60,000 [Utilisation of balance of Revaluation Reserve]
To PPE A/c 60,000
Case – III: Fair Value today is Rs. 8,00,000

Decrease in FV (compared to Carrying Amount) = 9,00,000 – 8,00,000

= Rs. 1,00,000
Revaluation Reserve (OCI) A/c – Dr. 90,000 [Utilisation of balance of Revaluation Reserve]
Revaluation Loss (P/L) A/c – Dr. 10,000 [Excess decrease charged to profit or loss]
To PPE A/c 1,00,000
 Upward Downward

Was there any downward Was there any upward

revaluation in previous revaluation in previous
year ? year ?

Yes No Yes No

1. First the increase to Charge to 1. First, utilize the

the extent of loss Revaluation balance of Charge to profit or
previously recognized is Reserve through Revaluation loss
charged to P/L OCI Reserve (OCI)

2. Excess amount is 2. Excess amount is

charged to Revaluation charged to profit or
Reserve through OCI loss
Frequency of Revaluation
Revaluations shall be made with sufficient regularity to ensure that the carrying
amount does not differ materially from that which would be determined using fair
value at the end of the reporting period.

Frequent revaluations are unnecessary for items of PPE with only insignificant changes
in fair value.

Instead, it may be necessary to revalue the item only every three or five years.
 Revaluation on Class of PPE
If an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to
which that asset belongs shall be revalued.

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:

(a) land;
(b) land and buildings;
(c) machinery;
(d) ships;
(e) aircraft;
(f) motor vehicles;
(g) furniture and fixtures;
(h) office equipment; and
(i) bearer plants.
Question – Audit Dec 2016
Kantipur Pvt. Ltd. owns five motors that it uses in its
business as PPE. The entity intends to carry three motors
under the cost model and the remaining two under the
revaluation model.
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
NFRS 5
◦ the date that the asset is derecognised
Derecognition
The carrying amount of an item of PPE shall be
derecognised:

(a) on disposal; or

(b) when no future economic benefits are

expected from its use or disposal.

The gain or loss arising from the derecognition of

an item of PPE shall be included in profit or loss
when the item is derecognised
 Example – Derecognition – Cost
Model
Y-1 Y-2
Depn = Rs. 1,00,000 Depn = Rs. 1,00,000

Cost = Rs. 10,00,000 Cost 10,00,000 Cost 10,00,000

R.V. = Nil (-) Acc. Depn (1,00,000) (-) Acc. Depn (2,00,000)
Life = 10 years Carrying Amount 9,00,000 Carrying Amount 8,00,000

Sold for Rs. 9,00,000

Depreciation(SLM)
= (10L – 0)/10 Bank A/c – Dr. 9,00,000
= Rs. 1,00,000 To PPE 8,00,000
To Gain on derecognition(P/L) 1,00,000
 Example – Derecognition –
Revaluation Model
Y-1 Y-2
Depn = Rs. 1,00,000 Depn = Rs. 10,10,000/9 = Rs. 1,12,222

Cost = Rs. 10,00,000 Cost 10,00,000 Carrying Amount = 897,778

R.V. = Nil (-) Acc. Depn (1,00,000)
Life = 10 years Carrying Amount 9,00,000
Fair Value 10,10,000 Sold for Rs. 9,00,000
Increase in FV 1,10,000
Bank A/c – Dr. 9,00,000
Depreciation(SLM) SoFP To PPE 8,97,778
= (10L – 0)/10 To Gain on derecognition(P/L) 2,222
R.R. 1,10,000 PPE 10,10,000
= Rs. 1,00,000
Revaluation Reserve A/c – Dr. 1,10,000
To Retained Earnings 1,10,000
 Treatment of Spares
Spares

General/Minor Spares Major Spares

Example: knots, bolts

Example: trailer of tractor,
light bulb of CT scan

Treat it as inventory Treat is as PPE

Expensed when
consumed