Assets: - An assets is a resources
- Controlled by an entity as a result of past event.
- From which future economic benefits are expected to flow to the entity.
Properties Plant & Equipment are tangibles item that:
- Are held for use in the production or supply of goods or services, for rentals to others, or for administrative purpose. And
- Are expected to use during more than one period.
Objective of IND AS
I. Objective is to prescribe the accounting treatment for PPE, so that users can recognize information about the entity investment in PPE & changes in investment during the year.
II. To provide assistance on the principal issues like :
- Recognition of the PPE
- Determination of the carrying amount of the PPE
- Depreciation charges
- Impairment loss
The cost of an item of PPE shall be recognize as an asset if, and only if:
- It is probable that future economic benefit associated with the items will flow the entity; and
- The cost of the item can be measured reliably.
Testing Controls for Audit Purpose:
Held for Use as per Definition
Life More than 1 year
Future economic benefit
Cost can be measured
All above conditions must be specified.
Some Special Points:
Spare Parts:- As per current AS 10 Spares Parts are usually charged to P&L, as and when consumed. However, if the spares can only be used in connection Fixed Assets and their use is expected to be irregular, in that case the cost is allocated over the remaining useful life of the asset. But In IND AS-16, in Para 8 it specifically mentioned that spares part, if fulfilled the requirements of definition of PPE are to be capitalized (Passed From all testings’) and to be amortized over the remaining period of life. And in case this part is to be replaced, in that case. First the spare part capitalized earlier are to be derecognized and then the new one is to be capitalized.
Inspection Charges: -If any major inspection is performed, its cost is recognized in the carrying amount of the item of property, plant and equipment, if all testing controls are fulfilled.
Cash (+) Cash Equivalents paid (+) the fair value of the other consideration given to acquire an asset at the time of :-
- Where applicable.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between markets participants at the measurement date.
Elements of Cost:-
a. Purchase Price (+) Import Duty (+) and non-refundable purchase taxes (-) trade discounts and rebates.
b. Costs Directly attributable to bring the asset in to the location and condition necessary for it to be capable of operating in the manner intended by the management.
Examples of directly attributable costs are:
- Cost of employee benefits.
- Cost of site preparation.
- Initial delivery and handling cost.
- Installation and assembly costs.
- Trial Run Cost
- Professional Fees
- Material issued from Stores
- Travelling Expenses
c. Initial estimate of the costs of dismantling and removing the items and restoring the site. For Example: - in case of coal mines when mines are allocated two type of plans are approved one is mine running plan. Another one is mine Closure plan. As per mines closure plan a certain amount have to deposit in escrow account. That is the cost of initial estimate of dismantling.
Cessation of recognition
The recognition of cost ceases when the asset is in location and condition necessary for it to be capable of operating in the manner intended by the management whether it is put to use or not or operating at less than full capacity.
Following costs are not included in the carrying amount of an item of PPE.
- Initial operating losses, such as those incurred while demand for the item's output builds up;
- Costs of relocating or reorganizing part or all of an entity's operation.
Incidental operation: -
Income & related expenditure of the incidental operation are to be recognized in respective classification of income & expense, if the incidental operation is not necessary for the operation
Cost of self-constructed Assets.
Cost of these assets is determined using the same principal as for an asset acquired. As per Ind-AS:2 if an entity make the similar asset for sale in normal course of business, the cost of the asset is usually the same as the cost of constructing an asset for the sale. Therefore the internal profits are eliminated and abnormal cost is not included in the cost.
Some New of IND AS 16
In case payment is deferred: -
In accordance with IND-AS 16, the cost of an item of PPE is its cash price equivalent at the recognition date. If the payment is deferred beyond normal credit terms, the difference between the cash price equivalent and total payment is charged as interest to P&L over the period, unless such interest is capitalized under IND AS-23.
Exchange of asset: -
The cost of such an item PPE is measured at fair value unless:
- The exchange transactions lacks commercial substance.
- The value of neither the asset received nor the asset given up is measurable.
An exchange transaction have the commercial substance if:
- The configuration of the cash flows of the asset received differs from the configuration of the asset transferred.
- The entity-specific value of the portion of the entity's operation affected by the transaction changes as a result of exchange.
Entity Specific Value the present value of the cash flows an entity expects to arise from the continuing use of an asset and from its disposal at the end of its useful life or expects to incur when settling a liability.
a. For the purpose of determining the commercial substance entity specific value of the operations effected must be taken post tax.
b. There is as such no concept of the commercial substance in AS-10, As per AS 10 Cost of Asset acquired is either the Fair value or book value. For this purpose Fair value may be of either the asset given or taken whichever more clearly evident.
Measurement after recognition
IND AS 16 requires an entity to choose either the cost model or the revaluation model as its accounting policy.
Cost Model:- This is same as current accounting standards PPE should be carried at: -
Carrying Value = Cost (-) Depreciation.
Revaluation Method: - If revaluation model is adopted then revaluations must be kept sufficiently updated, so that the carrying amount does not differ materially from the Fair Value as on date.
Increase in Carrying Value:-The increase will be recognized in other comprehensive income and accumulated in equity under heading of revaluation surplus. However, the increase will be recognized in P&L to the extent that it reverses a revaluation decrease of the same asset previously recognized in P&L.
Decrease in Carrying Value: - If an assets carrying amount is decreased as a result of a revaluation, the decrease will be recognized in P&L.However, the decrease will be recognized as other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset.
Meaning of Definition: - Systematic allocation of the depreciable amount of an asset over its useful life.
Depreciable Amount:- Cost Of an asset (Discussed above) (-) Residual Value.
Residual Value of an asset is the estimated amount that an entity would currently obtain from disposal of asset, after deducting the estimated cost of disposal. If the asset were already of the age of and expected at the end of its useful life.
Transition Provision:- Full retrospective restatement as per IND AS 16 may not only be difficult, but would often also involve undue cost and efforts. IND AS 101 permits a first time adopter to measure the items of PPE at Deemed Cost at the date of transition to IND AS. For PPE there are two separate deemed cost basis. In IND AS 101:-
- Fair Value/ revaluation deemed cost.
- Previous GAAP carrying value.
Useful Life: - Useful life means
- The period over which an asset is expected to be available for use by an entity; or
- The no. of production or similar units expected to be obtained from the asset by an entity.
Schedule II of the companies act 2013, prescribe the estimated life for various items of PPE. It also fixes residual value for items @ 5% of the original Cost. UnderIND AS 16, an item of PPE is depreciated based on estimated useful life and residual value. It is not acceptable to treat useful Lives/ residual value prescribed under schedule II as maximum limit, if the management estimates of useful life other than that prescribes in Schedule II. Companies will need to disclose justification for using different useful life.
Practical Application of Depreciation as Per IND AS 16 & Schedule II
Depreciable value was:- Carrying value as 31.03.2014 (-) 5% of Gross Value
IND As 16:- 1.04.2015 or 1.04,2016 (as the case may be) (At the time of transition, in same way carrying value on 31.03.2015/16 can be taken as deemed cost and have to depreciate in balance no of years.
Depreciable value can be:- Carrying value as 31.03.2015/16 (-) 5% of Gross Value
As per IND AS 16 as well as Schedule II Component accounting is must In Component accounting followings steps have to be followed. :-
Identify those parts which have: -
- Significant Cost
- Different useful Life
Identified parts are then grouped together if they have similar useful life.
Identification of significant part is a matter of judgment and decide on case to case basis. For Assets requiring major inspection on periodic basis, companies will identify major inspection as a separate component, which can be aggregated with other parts having similar life of depreciation purpose.
1. The carrying amount of an item of PPE shall be de-recognised:
- On disposal; or
- When no future economic benefits are expected from its use.
The gain/loss from de-recognition should be included in Profit & loss.
2. The disposal of an item may be occur in different ways:
- by sale;
- by entering into finance lease;
- by donation.
The date of disposal is the date the recipient obtains the control of that item in accordance with requirements of Ind-AS:115.