Ind AS-16 deals with Accounting and depreciation of property, plant and equipment, which are covered by Corresponding AS-10.
It applies to all kinds of tangible property, plant and equipment except:
- Assets held for Sale and Assets of Discontinued Operations (Ind AS 2)
- Biological Assets other than bearer plant (Ind AS 41)
- Assets for Exploration and Evaluation of Mineral Resources (Ind AS 106)
- Mineral Right and Mineral, oil and natural gas reserves
2. Meaning of Plant, Property and Equipment (PPE)
Plant, Property and Equipment (PPE) are assets which are held for use in production of goods, rendering of services, administrative use, and rental purpose and are expected to be used in more than one period
It does not include assets held for sale.
3. Recognition Principle
Cost of Plant, Property and Equipment (PPE) shall be recognized if it is :
- Probable that future economic benefit will flow to entity, AND
- Cost can be measured reliably
Spare parts, Stand-by equipments and servicing equipments are recognized, only when they meet 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 PPE, shall be recognized as asset as they enable entity to derive future economic benefits from related assets.
4. Component Based Accounting
Components of assets having Substantial Value and different useful life should be recorded as separate asset and depreciated separately from the main asset of which it is part. However, depreciation rate and method may be same but accounting shall be separate.
Schedule II of Companies Act, 2013 also mandates Component Based Accounting.
5. Initial Cost for Recognition
Plant, Property and Equipment (PPE) shall be measured at cost, which includes:
+ Import Duty
+ Non-Refundable Taxes
+ Costs directly attributable
+ Initial Cost of dismantling and removing the item, if entity has an obligation that it
Incurs on acquisition of asset
(-) Discounts and Rebates
In case payment is deferred beyond normal terms of credit, the difference between cash price equivalent and total payment made is recognized as Interest over the period of credit and such interest may be capitalized in accordance with Ind AS 23.
Cost involved in using or redeploying asset shall not be included in carrying amount.
Self-Constructed assets shall be recognized at cost after eliminating internal profits.
6. Subsequent Cost
In case of regular Repair & Maintenance of PPE or day-to-day servicing of item, cost shall be recognized in Statement of Profit & Loss.
However, some parts of asset may require replacement at regular intervals. Also, items may be procured to make less frequently recurring replacement. Cost of such replacing part may be recognized as asset if recognition principle is met.
Carrying amount of part that is replaced shall be de-recognized.
Cost of any major inspection is recognized in the carrying amount of item of PPE as a replacement if recognition criterion is satisfied.
7. Exchange for Non-Monetary Assets
Assets acquired by way for exchange of non-monetary assets or combination of monetary and non-monetary assets, shall be recognized at Fair Value of asset acquired, unless:
- Exchange transaction lacks commercial substance* ; Or
- Fair value of neither asset acquired nor asset given up can be reliably measured
* Commercial substance is determined by considering the extent to which its future cash flows are expected to change as result of transaction.
8. Subsequent Measurement
Subsequent measurement of PPE can be done by:
- By Cost Model; Or
- By Revaluation Model
The policy chosen shall apply to entire class of PPE.
In case of Cost Model, PPE is carried at cost of asset acquired less accumulated depreciation and accumulated impairment losses.
In case of Revaluation Model, PPE is carried at Fair Value at date of revaluation less any subsequent accumulated depreciation and accumulated impairment loss. If an item of PPE is revalued, the entire class of PPE to which asset belongs shall be revalued, to avoid reporting of amounts in financial statements that are 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 recognized in Other Comprehensive Income and accumulated in equity under heading of Revaluation surplus. However, increase shall be recognized in Profit & Loss to the extent that it reverses a revaluation decrease of same asset previously recognized in P&L.
In case, amount is decreased, it shall be recognized in Profit & Loss. However, decrease shall be recognized in Other Comprehensive Income to the extent of any credit balance existing in Revaluation Surplus in respect of that asset.
Depreciation is systematic allocation of depreciable asset over a useful life of asset.
Each part of item of PPE with a cost that is Significant in relation to total cost of item shall be depreciated separately. Entity shall allocate the amount initially recognized in respect of item of PPE to its significant parts and depreciate each such part separately.
Components of PPE having same useful life and depreciation method may be grouped in determination the depreciation charge.
Depreciation charge for each year shall be recognized in Profit & Loss, unless it is included in carrying amount of another asset.
Sometimes, future economic benefits embodied in an asset are absorbed in producing other assets. In this case, depreciation charge constitutes part of cost of other asset and is included in its carrying amount.
Land and buildings are separable assets and are accounted for separately, even when they are purchased together except quarries and sites for landfill.
a. Depreciation Method
Depreciation method used shall reflect the pattern in which asset's future economic benefits are expected to be consumed and 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 accounting estimate and shall take effect prospectively.
b. Depreciable Amount and period
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 asset's carrying amount, depreciation charge shall be Zero, unless and until it decreases to a value below the carrying amount.
Residual value and useful life of asset shall be reviewed at least at each financial year-end and change if any, shall accounted for as change in accounting estimates.
Depreciation begins when 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.
Carrying amount of an item of PPE shall be recognized:
- On disposal, Or
- When no future economic benefits are expected from its use.
Gain or loss arising from de-recognition shall be included in Profit & Loss. Gains, if any shall not be classified as revenue.
- Measurement basis used for determining carrying amount
- Depreciation Methods used
- Useful lives or depreciation rates used
- Gross carrying amount and accumulated depreciation at beginning and end of year
- Reconciliation of carrying amount at the beginning and end of year
Disclosures related to Revalued Assets
- Effective date of revaluation
- Whether an independent valuer was involved
- Methods and significant assumptions applied in estimating fair values of items
- Extent to which fair values of items were determined directly by reference to observable prices in active market
- Revaluation Surplus, indicating change for the period and any restriction on distribution of balance to shareholders
- Existence and amounts of restrictions on title and PPE pledged as security
- Amount of expenditure recognized in carrying amount of PPE in course of its construction
- Amount of contractual commitments for acquisition of PPE
- Amount of compensation from third parties for items in PPE that were impaired, lost or given up
- Amount of assets retired from active use and held for disposal
12. Changes in Existing Decommission, Restoration and Other Liabilities
Cost of existing decommissioning, restoration or other similar liability may undergo change on account of:
- Changes in liabilities
- Price Adjustments
- Changes in Duties
- Changes in initial estimates
- Similar factors
Such change shall be accounted for, on the basis of method adopted for measuring carrying amount of PPE.
If Cost Model is adopted, Changes in the liability shall be added to, or deducted from cost of related asset in the current period, subject to carrying amount of asset in case of deduction.
If the adjustment results in addition to the cost of asset, fact shall be considered that new carrying amount may not be fully recoverable. Such case shall be dealt with in accordance with Ind AS 36.
If Revaluation Model is adopted,
- Decrease in liability shall be credited directly to revaluation surplus, except that it shall be recognized in P&L to the extent it reverses a revaluation deficit w.r.t related asset.
- Increase in liability shall be recognized in P&L, except that it shall be debited to Revaluation Surplus to the extent of any credit balance in respect of related asset.
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