Provision requiring additional disclosures in financial statements regarding methods and significant assumptions applied in estimating fair values and extent to which fair values were determined directly by reference to observable prices in active market have been deleted. However, now there is a requirement to disclose for each revalued class of PPE, the carrying amount that would have been recognised had the assets been carried under the cost model.
Indian Accounting Standard (Ind AS) 16 deals with the accounting and depreciation of property, plant and equipment, which are also covered by corresponding AS-10.
1. What is the scope of IND AS 16?
It applies to all kinds of tangible property, plant and equipment except :
a. Assets held for sale and assets of discontinued operations (See Ind AS 105)
b. Biological assets other than bearer plants (See Ind AS 41)
c. Assets for exploration and evaluation of mineral resources (See Ind AS 106)
d. Mineral rights and mineral reserves such as oil, natural gas and similar resources.
2. What is the Meaning of Plant, Property and Equipment (PPE) as per Ind AS 116 ?
Plant, Property and Equipment (PPE) are assets which are held for use in the production of goods, rendering of services, administrative uses, or rental purposes and are expected to be used in more than one period. It does not include assets that are held for sale.
3. Recognition Principle
Cost of Plant, Property and Equipment (PPE) shall be recognised if :
a. It is probable that future economic benefit will flow to the entity, and
b. The cost of the item can be measured reliably.
Spare parts, Stand-by equipments and servicing equipments are recognised, only when they meet the above definition of PPE. Otherwise, they are classified as inventory.
Judgment is required in applying the recognition criteria to specific circumstances.
However, PPE acquired for safety or environmental reasons, although not directly increasing future economic benefits of any particular existing item of PPE, is to be recognised as assets as they enable the entity to derive future economic benefits from related assets.
4. Component Based Accounting
Components of an asset having substantial value and different useful lives should be recorded as separate assets and depreciated separately from the main asset of which it is part. However, depreciation rate and method may be the same, it is only the accounting that shall be separate.
Schedule II of Companies Act, 2013 also mandates Component Based Accounting.
5. Initial Cost for Recognition
Plant, Property and Equipment (PPE) should be measured at cost, which includes:
Purchase Price (+) Import duty (+) Non-refundable taxes (+) Costs directly attributable to installing the asset (+) Initial Cost of dismantling and removing the item, if the entity has an obligation that it incurs on acquisition of asset
(-) Discounts and Rebates
In case payment is deferred beyond the normal terms of credit, the difference between the cash price equivalent and total payment made is recognised as interest over the period of credit unless such interest is capitalised in accordance with Ind AS 23.
Costs incurred in using or redeploying an asset are not included in the carrying amount.
Self-Constructed assets shall be recognised at cost after eliminating internal profits.
6. Subsequent Cost
In case of regular repair & maintenance of PPE or day-to-day servicing, costs are to be recognised in the Statement of Profit & Loss.
However, some parts of the asset may require replacement at regular intervals. Also, items may be procured to make less frequently recurring replacements. Cost of such replacement may be recognised as an asset if the recognition principle is met.
The carrying amount of those parts that are replaced shall be de-recognised .
Cost of any major inspection is recognised in the carrying amount of an item of PPE as a replacement if the recognition criteria are satisfied.
7. Exchange for Non-Monetary Assets
An asset acquired in an exchange of non-monetary assets or a combination of monetary and non-monetary assets, shall be recognised at the fair value of the asset acquired, unless:
a. The exchange transaction lacks commercial substance* or b. The fair value of neither the asset acquired nor the asset given up can be reliably measured.
* An entity determines commercial substance by considering the extent to which its future cash flows are expected to change as result of the transaction.
8. Subsequent Measurement
Subsequent measurement of an item of PPE can be done by:
a. The Cost Model or
b. The Revaluation Model.
The accounting policy chosen shall apply to an entire class of PPE.
In case of cost model, an item of PPE is carried at the cost of the asset acquired less accumulated depreciation and any accumulated impairment losses.
In case of revaluation model, PPE is carried at the fair value on the date of revaluation, less any subsequent accumulated depreciation and any accumulated impairment loss. If an item of PPE is revalued, the entire class of PPE to which that
asset belongs shall be revalued, to avoid reporting of amounts in financial statements that are a mixture of costs and values at different dates.
9. Accounting Treatment of Revaluation
If an asset's carrying amount is increased as result of revaluation, it shall be recognised in Other Comprehensive Income and accumulated in equity under heading of Revaluation surplus. However, the increase shall be recognised in Profit or Loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in Profit or Loss.
In case, the amount is decreased, it shall be recognised in Profit or Loss. However, the decrease shall be recognised in Other Comprehensive Income to the extent of any credit balance existing in the Revaluation Surplus in respect of that asset.
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Each part of item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separately. An entity is to allocate the amount initially recognised in respect of an item of PPE to its significant parts and depreciate each such part separately.
Components of PPE having the same useful life and depreciation method may be grouped in determining the depreciation charge. The depreciation charge for each year shall be recognised in Profit or Loss, unless it is included in the carrying amount of another asset.
Sometimes, future economic benefits embodied in an asset are absorbed in producing other assets. In this case, the depreciation charge constitutes part of the cost of the other asset and is included in it's carrying amount.
Land and buildings are separable assets and are accounted for separately, even when they are purchased together except for quarries and sites for landfill.
a. Depreciation Method
The depreciation method used shall reflect the pattern in which the asset's future economic benefits are expected to be consumed. It shall be reviewed at least at each financial year-end and, in case it is required to be changed, it shall be treated as change in accounting policy and the accounting estimate and shall take effect prospectively.
b. Depreciable Amount
Depreciable amount of asset is determined after deducting its residual value. In case, residual value of asset increases to an amount equal to or greater than the asset's carrying amount, depreciation charge will be Zero, unless and until it decreases to a value below the carrying amount.
Residual value and useful life of an asset shall be reviewed at least at each financial year-end and changes if any, shall be accounted for as changes in accounting estimates.
c. Depreciation Period
Depreciation begins when an asset is available for use and ceases when residual value exceeds carrying amount or asset is retired from active use and is held for disposal.
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.
The gain or loss arising from de-recognition shall be included in Profit or Loss. Gains, if any, shall not be classified as revenue.
The financial statements shall disclose, for each class of PPE:
a. Measurement bases used for determining carrying amount
b. Depreciation methods used
c. Useful lives or depreciation rates used
d. Gross carrying amount and accumulated depreciation at the beginning and end of the period and
e. Reconciliation of carrying amount at the beginning and end of the period
The financial statements shall also disclose, in relation to revalued assets:
a. Effective date of revaluation b. Whether an independent valuer was involved c. For each revalued class of PPE, the carrying amount that would have been recognised had the assets been carried under the cost model, and d. Revaluation Surplus, indicating changes for the period and any restriction on distribution of balance to shareholders.
Additionally, the financial statements should disclose :
a. Existence and amounts of restrictions on title and PPE pledged as security b. Amount of expenditure recognised in carrying an amount of PPE in the course of its construction c. Amount of contractual commitments for acquisition of PPE d. Amount of compensation from third parties for items in PPE that were impaired, lost or given up included in profit or loss.
13. Changes in Existing Decommissioning, Restoration and Other Liabilities
Cost of existing decommissioning, restoration or other similar liability may undergo changes on account of:
i. Changes in liabilities
ii. Price adjustments
iii. Changes in duties
iv. Changes in initial estimates v. Similar factors
Such change shall be accounted for, on the basis of the method adopted for measuring the carrying amount of PPE.
If Cost Model is adopted;
a. Changes in the liability shall be added to, or deducted from the cost of related assets in the current period, subject to carrying an amount of asset in case of deduction.
b. If the adjustment results in an addition to the cost of an asset, the fact shall be considered that the new carrying amount may not be fully recoverable. Such cases should be dealt with in accordance with Ind AS 36.
If Revaluation Model is adopted;
a. A decrease in liability shall be credited directly to revaluation surplus, except that it shall be recognised in profit or loss to the extent it reverses a revaluation deficit w.r.t the related asset.
b. An increase in liability shall be recognised in profit or loss, except that it shall be debited to Revaluation Surplus to the extent of any credit balance in respect of related assets.
14. Difference Between IND AS 16 and IAS 16
The key difference between IAS 16 & IND AS 16, is with respect to the cost model for Ind AS 40 i.e. investment property under the cost model is measured as per IAS 16 but as per IND AS investment property is measured as per Ind AS 40.