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Ind AS 16
Template
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Template
Ind AS 16
PROPERTY,
PLANT &
EQUIPMENT
(PPE)
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OVERVIEW OF IND AS 16 03
• Objective of Ind AS 16
• Scope
• Definition and Recognition of (PPE)
• Measurement at Recognition
• Subsequent costs and PPE
• Measurement after recognition
• Depreciation and Component
Accounting
• De-recognition
• Disclosure
• Comparison with Ind AS 16 Vs AS 10
OBJECTIVE 04
• Prescribe the
accounting treatment
for property, plant
and equipment.
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SCOPE 05
Shall not apply:
• PPE classified as held for sale (covered in Ind AS 105, Non-
current Assets Held for Sale and Discontinued Operations)
• Biological assets related to agricultural activity other than bearer
plants (covered in Ind AS 41, Agriculture) **
• The recognition and measurement of exploration and evaluation
assets. (Ind AS 106, Exploration for and Evaluation of Mineral
Resources)**
• Mineral rights and mineral reserves such as oil, natural gas and
similar non-regenerative resources**
• Any other items covered under specific Accounting Standards
like AS17, Leases
• Investment property (see Ind AS 40 Investment Property)
• **Note: This standard applies to PPE used to develop or maintain
these assets.
a) are held for use in the (a) it is probable that future economic
production or supply of goods benefits associated with the item
or services, for rental to others, will flow to the entity; and
or for administrative purposes;
and (a) the cost of the item can be
measured reliably
b) are expected to be used during
more than one period
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Explanation - Definition of PPE 07
However, land or a building held to earn rentals, or for
capital appreciation or both, rather than for use in the
entity or for sale in the ordinary course of business will be
covered under Investment Property under Ind As 40.
The part occupied will be classified as PPE as per Ind As 16 and the floors rented out
will be classified as investment property as per Ind AS 40.
Recognition of PPE 08
• What will happen if probable future economic benefits
associated with the item will not flow to the entity
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Measurement at recognition 09
Examples of directly attributable
costs (para 17)
Measurement at recognition 10
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Incidental operations need not be capitalised if
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they are not Meeting the criteria –Necessity to
bring the item to the location and condition for
its intended use. (para 21)
e.g. -Income may be earned
through using a building site as a
car park until construction
starts. The income and related
expenses of incidental
operations are recognised in
profit or loss.
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The cost of a self-constructed asset 11
This is also determined using the
same principles as for an acquired
asset. (para 22)
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Class of PPE 13
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.
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Measurement after recognition 15
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choice of models
(shall choose either of two)(para 29)
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Cost Model Revaluation Model
PPE = cost less any PPE = Fair Value less any
accumulated subsequent accumulated
depreciation and any depreciation and subsequent
accumulated accumulated impairment
impairment losses. losses. (para31)
(para 30)
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants
at the measurement date
Effects of Revaluation 16
Revaluation
Increase in Decrease in
carrying amount Carrying amount
To the extent of previous
To the extent of previous
revaluation increase
revaluation decrease
Recognise to Recognise to
Other Comprehensive
P&L Income
Remaining
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Accounting for Revaluation Model 17
• Increase in carrying amount due to revaluation will go to OCI.(para 39)
• Decrease in carrying amount due to revaluation will go revaluation reserve.
(para 40)
Example 1: A Company owns two buildings ,’A’ and ‘B’, which are revalued as follows:
Building A Building B
Current Value 400,000 250,000
Note : The Credit to the revaluation surplus will be shown under “Other Comprehensive
Income”.
The case is similar for a decrease in value on revaluation . Any decrease should be
recognized as an expense ,except where it offsets a previous increase taken as a
revaluation surplus in owners’ equity . Any decrease greater than the previous upwards
increase in value must be taken as an expense in the profit or loss.
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Accounting for Revaluation Model 19
• Time frame for Revaluation (para 38)
• The items within a class of PPE are revalued simultaneously.
• However, 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
-the revaluations are kept up to date.
• The depreciation charge for each period shall be recognised in profit or loss
unless it is included in the carrying amount of another asset.(para 48)
• Depreciation of an asset ceases (para 55): at the earlier of the date asset
is classified as held for sale or
is derecognised
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Depreciation & Component accounting 21
• The residual value and the useful life of an
asset
- shall be reviewed at least at each financial
year-end and
- If expectations differ, the change(s)
- shall be accounted for as a change in an
accounting estimate in accordance with Ind AS 8,
Accounting Policies, Changes in Accounting
Estimates and Errors. (para 51)
Depreciation Methods:
Choice of method:
-Variety of depreciation
1. Straight Line Method can be used (para 62)
2. Diminishing balance method
3. Units of Production method
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Depreciation & Component accounting 23
• Following factors may broadly assist in arriving at
component identification:
I. Shut down or major repairs and maintenance.
II. Useful life estimates of major components at the acquisition date.
III.Technical knowhow and obsolescence .
• Land and buildings are separable assets and are accounted for
separately, even when they are acquired together. (para 58)
Impairment 24
• An impairment loss is the amount by which the carrying amount of an
asset exceeds its recoverable amount. (para 6)
• Ind AS 36, Impairment of Assets applies to determine whether an item of
property, plant and equipment is impaired(para 63)
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De-recognition 25
• The carrying amount of an item of property, plant and equipment
shall be derecognised (para 67):
(a) on disposal; or
(b) when no future economic benefits are expected from its use
or disposal.
Disclosure 26
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Disclosure requirement as per para 73
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(a) the measurement bases used for determining the gross carrying amount;
• Reconciliation of the carrying amount at the beginning and end of the period showing:
(i) additions;
(ii) assets classified as held for sale
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Disclosure 27
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Disclosure requirement as per para 74
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The financial statements shall also disclose
(a) the existence and amounts of restrictions on title, and PPE pledged as
security for liabilities; e.g. loan taken to acquire an asset.
(b) the amount of expenditures recognised in the carrying amount of an item of
PPE in the course of its construction;
(c) the amount of contractual commitments for the acquisition of PPE; and
(d) if it is not disclosed separately in the P&L statement, the amount of
compensation from third parties for items of PPE that were impaired, lost or
given up that is included in profit or loss.
Disclosure 28
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Disclosure requirement as per para 76
If items of property, plant and equipment are stated at revalued amounts, the
following shall be disclosed addition to the disclosures required by Ind AS113:
a) the effective date of the revaluation;
b) whether an independent valuer was involved;
c) for each revalued class of property, plant and equipment, the carrying amount
that would have been recognised had the assets been carried under the cost
model; and
d) the revaluation surplus, indicating the change for the period and any restrictions
on the distribution of the balance to shareholders.
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Transitional provision under Ind AS 101
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Deemed Cost (Ind AS 101) :
Revaluation Reserve is directly transferred to retained earnings on Revaluation Reserve is transferred to Income Statement on
derecognition. derecognition.
Useful Life of PPE Depreciation amount is based on useful life of the assets or
Schedule XIV rates, whichever is higher.
Depreciation to be calculated based on useful life.
Major overhauling or Shut down Cost
Cost of major inspections and overhauls are recognised in the Costs of major repairs are expensed when incurred.
carrying amount of property, plant & equipment and amortised till
next major maintenance date.
Review of Useful Life, Residual Value, Depreciation Method
IAS 16 mandates review of useful life, residual value and Depreciation method is a policy decision, which can be
depreciation method at each year end. It is an estimate and any reviewed only if certain criteria are met. Any change is to be
change is accounted prospectively. accounted retrospectively.
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Industry Impact Analysis – Ind AS 16
Property Plant & Equipment 31
Commodity manufacturing Industry – Crude, Ore, Power
Way forward 32
(i) To start updating the fixed asset records in SAP with major component
details. This can be done by creating sub-assets in the asset master.
(ii) Any new capitalisation should be based on component approach assessing
specific useful life of each component and then applying the aggregate rule
(iii) JCA format to be revised so that necessary information can be captured for
identification of component and estimate the useful life if differs from the
main equipment.
(iv) Assessment of useful life and residual value will have to be done by the
management on a regular basis.
(v) Estimate dismantling, decommissioning, restoration liabilities valued at
discounted cash flow basis of production facilities, wells etc. at the
beginning and continue to reassess on a regular basis.
(vi) Identify the assets which are required to be componentise based on
assessment of separate useful life:
- LPG Plant
- Pipeline assets
- Pump Stations asset
- Gas gathering station (Madhuban GGS etc.)
- Telecom assets
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• Appendix A addresses how the effect of the following events that change
the measurement of an existing decommissioning, restoration or similar
liability should be accounted for :
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