Ind AS 16 on PPE

Discussion on the basics of Ind AS on PPE

1. Understanding
Ind AS
CA PRANAV JOSHI, PARTNER | P. G. JOSHI & CO.
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants 1

2. Ind AS 16
PLANT, PROPERTY & EQUIPMENT

3. Basics of Ind AS
HOW IS IT FRAMED?
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants 3

4. Framework
•Sets the basic boundaries of the standard;
•Gives definitions of key terms used in the standard
Objective, Scope
& Definitions
•Tells us what can be accounted for in the books
•Does not tell the amount/value to be accounted
Recognition
•Gives rules for arriving at the value at which the
recognised item is to be accounted for
Measurement
•Gives principals for removing a recognised item De-recognition
•Information to be made available to the reader for
better understanding of the financial statements
Disclosures
4 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

5. Ind AS 16
PROPERTY, PLANT AND EQUIPMENT (PPE)

6. Overview of the Session
Objective, Scope
& Definitions
Recognition
Measurement
De-recognition
Disclosures
Initial
Recognition
Subsequent
Recognition
At
Recognition
After
Recognition
Cost Model
Revaluation
Model
Depreciation
6 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

7. Objective, Scope &
Definitions
BASIC BOUNDARIES OF THE STANDARD
DEFINITIONS OF KEY TERMS USED IN THE STANDARD

7 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
PPE A/c

8. The objective of this Standard is to prescribe the
accounting treatment for Plant, Property and
Equipment [PPE].
Objective
8 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

9. The Principal Issues in accounting for Property,
Plant and Equipment are:

Principle Issues
Particulars Ind AS Indian GAAP
Recognition of the Assets Ind AS 16 AS 10
Determination of their Carrying Amounts Ind AS 16 AS 10
Depreciation Charges Ind AS 16 AS 6
De-Recognition Ind AS 16 AS 10
9 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

10. Scope
This Standard Shall be applied in accounting for PPE
except when another standard requires / permits
different accounting treatment
Scope Exception:
◦PPE which has been classified as Held For Sale – Ind AS 105
◦Biological assets related to agricultural activity – Ind AS 41
◦Exploration and evaluation assets – Ind AS 106
◦Mineral rights and Mineral reserves such as oil & non
generative resources
10 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

11. Definitions
PPE (IND AS 16)
All tangible Items that are
◦Held for the purpose of
•Production or Supply of
goods and services; or
•for rental to others; or
•for other administrative
purposes; and
◦Expected to be used during
more than one period.
FIXED ASSETS (AS 10)
Fixed asset is an asset
◦Held with the intention of
•being used for the
purpose of producing or
providing goods or
services; and
◦Is not held for sale in the
normal course of business.
11 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

12. DEPRECIABLE AMOUNT
(IND AS 16)
Depreciable amount is the
cost of an asset, or other
amount substituted for cost,
less its residual value.
GROSS BOOK VALUE (AS
10)
Gross book value of a fixed
asset is its historical cost or
other amount substituted for
historical cost in the books of
account or financial
statements.
When this amount is shown net
of accumulated depreciation, it
is termed as net book value.
12 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Definitions

13. Carrying Amount
◦Amount at which an asset is recognized after deducting any
accumulated depreciation and accumulated impairment losses
Cost
◦Amount of cash or cash equivalents paid or the fair value of the other
consideration given to acquire an asset at the time of its acquisition
or construction
Depreciation
◦Systematic allocation of the depreciable amount of an asset over its
useful life.
13 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Definitions (Contd.)

14. Definitions (Contd.)
Residual value
◦Estimated amount that an entity would currently obtain from
disposal of the asset, after deducting the estimated costs of disposal.
Useful life
a.Period over which an asset is expected to be available for use by
an entity; or
b.Number of production or similar units expected to be obtained
from the asset by an entity.

14 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

15. Recognition
WHAT TO ACCOUNT FOR ?
15 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
PPE A/c
? ?

16. Ind AS 16
◦The cost of an item of PPE shall be recognised as asset, if
and only if –
◦it is probable that future economic benefits associated with the
item will flow to the entity; and
◦cost of the item can be measured reliably
AS 10
◦Any item which falls under the definition of a fixed asset
should be recognised as a Fixed Asset.
Initial Recognition
16 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

17. 1. Spare Parts & Servicing Equipment
If they can be used
only in connection
with an item of PPE
Recognition criteria
are met?
Spare Parts and Servicing Equipment
Day to Day servicing
& Consumables
Expense out Capitalise
No
Yes
Subsequent Recognition
17 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

18. 2. Major Inspection
◦Ind AS 16 requires that the cost of major inspections should be
capitalised with consequent de-recognition of any remaining carrying
amount of this cost of the previous inspection. Existing AS does not
deal with this aspect.

Subsequent Recognition
100% 80% 60% 40%
2011 2012 2013 2014
Inspection Cost
Cost of Asset
Derecognize
18 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

19. Component Approach
“Each part of an item of property, plant and equipment
with a cost that is significant in relation to the total cost
of the item shall be depreciated separately.”
This inter se requires separate recognition of each
component. The same would require the auditor’s
judgment on:
◦Separable criteria – Significant Cost
◦Useful Life

19 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

20. Particulars Allocated cost Residual value Useful life Depreciation
Keel 120,000,000 6,000,000
25
4,560,000
Bridge 70,000,000 10,500,000 2,380,000
Bulkhead 90,000,000 9,900,000
20
4,005,000
Propulsion system 30,000,000 3,000,000 1,350,000
Decks 100,000,000 5,000,000
15
6,333,333
Boiler 10,000,000 1,000,000 600,000
Refrigeration system 20,000,000 4,000,000
11
1,454,545
Fresh water generator 10,000,000 1,000,000 818,182
Total 45,00,00,000 4,04,00,000 2,15,01,060
Component Approach (Example)
20 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

21. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Q&A
A company installed a turbine in 2007. It bought another turbine
in 2009 as backup in case the installed one fails. Cost of the 2nd is
nearly same as the 1st, and probability that it will be used is quite
low. It classifies the 2nd turbine under inventory as an
“emergency spare”?.
Q – Is this accounting correct?
21
A – No. Though use of this stand-by equipment will be irregular, it
fulfils both conditions of recognition and is a PP&E to be
separately depreciated over the shorter of its expected useful life
(from 2009) or the life of the plant the turbine is part of.

22. Q&A
Company M buys five new machines for use in its
production facility. Simultaneously, it purchases a spare
motor to be used as a replacement if a motor on one of the
five machines breaks.
Q – Should the spare motor be classified as PP&E?
22 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
A – As this major spare will be used in production of goods,
and once brought into service, will be operated during more
than one period, it should be classified as PP&E.

23. AMOUNT INITIALLY TO BE ACCOUNTED FOR
Measurement at
Recognition
23 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
PPE A/c
Asset ?

24. Measurement at Recognition – At
Cost
An item of PPE that qualifies for recognition as an asset
should be measured at its cost.
Elements of Cost
◦Purchase price
◦Directly attributable costs to bringing the asset to the location
and condition necessary for it to be capable of operating in the
manner intended by management.
◦Initial estimate of dismantling, removal and site restoration
costs (recognized and measured in accordance with Ind AS 37
Provisions, Contingent Liabilities and Contingent Assets)
24 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

25. Elements of Cost
Purchase Cost

Including Taxes,
Net off rebates
Direct Attributable
Costs
to bringing the asset to
the location and condition
necessary for it to be
capable of operating in
the manner intended by
management.
Eg: Site Preparation,
Professional Fees, Freight.
Initial estimate of
dismantling, removal and
site restoration costs
Estimated cost of leaving
the land in the condition
as it was acquired

Eg: Mining Industry,
Nuclear Power Plant.
25 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

26. Purchase Price
Cash Purchase: Cash Price Equivalent at the time of
recognition.
◦If the payment is deferred, the price is discounted to the
PV at the time recognition.
Exchange of Assets
◦Fair value of the asset given up, unless the Fair value of
acquired asset is more clearly evident.
26 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

27. Q&A
A company acquired a machine that its employees had never operated
before. During installation, employees received intensive training. Cost
includes hiring of trainers + directly attributable cost of employee wages
for the training days. Without training, the machine could not have
been used.
Q – Can the training costs expenses and employee wages be
capitalised?
27 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
A – The Training costs can be directly attributable to the operating of
the machine. The employee wages will not be directly attributable.

28. Cessation of recognition
Recognition of costs in the carrying amount of an
item of property, plant and equipment ceases
when the item is in the location and condition
necessary for it to be capable of operating in the
manner intended by management.
28 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

29. Cessation of recognition
Purchase Cost Direct Attributable
Costs
Initial estimate of
dismantling, removal and
site restoration costs
January, 2016 March, 2021
Cessation of Recognition
March, 2016
29 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Present Value (PV)

30. Dismantling, Removal & Site
Restoration (part of Ind AS 37)
March, 2016
(PV @ 10%)
March, 2021
(Absolute)
Rs. 62.09 Rs. 100

31.03.2017 Depreciation A/c. Dr. Rs. 12.42 (Rs. 62.09/5 Years)
To PPE Rs. 12.42 (Rs. 62.09/5 Years)

P&L A/c. Dr. Rs. 6.209 (Rs. 62.09 * 10%)
To Prov. For Dismantling Liability Rs. 6.209 (Rs. 62.09 * 10%)

Unwinding of Discounting
30 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
31.03.2016 PPE A/c Dr. Rs. 62.09
To Prov. For Dismantling Liability Rs. 62.09

31. Illustration
Year PPE A/c
(PV of Cost)
P&L A/c
Unwinding @ 10% of
provision amount)
Provision A/c
Dr. Dr. Cr.
31-03-16 62.09 - 62.09
31-03-17 - 6.21 68.30
31-03-18 - 6.83 75.13
31-03-19 - 7.51 82.64
31-03-20 - 8.26 90.91
31-03-21 - 9.09 100.00
Total 62.09 37.91
Total amount required for dismantling!
31 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

32. Recognition – Other considerations
Expenditure and Income from incidental Operations
before or during construction/development not in
connection with construction/development are not
recognized as PPE (Para 21). For example, incidental
income during construction.
Self constructed assets should exclude
◦Internal profits;
◦Abnormal wastages eliminated; and
◦Borrowing cost only to the extent recognized under Ind AS 23
(Para 22)

32 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

33. POST CAPITALIZATION ACCOUNTING
Measurement after
Recognition
33 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
PPE A/c
Asset xxx
+/- ?

34. Subsequent Measurement
Accounting Policy to applied to entire class of asset
Accounting Policy
Cost Model

Cost
Less Accumulated Depreciation
Less Impairment Losses
Revaluation Model

Revalued amount
Less Subsequent accumulated
Depreciation
Less Impairment Losses
34 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

35. Class of Asset
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:
◦Land Land And Buildings
◦Machinery Ships
◦Aircraft Motor Vehicles
◦Furniture & Fixtures Office Equipment
35 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

36. Revaluation Model – Basic Rules
I.Revaluation Should be done for entire class of
PPE
II.Revaluation should be done at sufficient
regularity
•Frequency of revaluation depends upon the volatility
of change in the fair value.
36 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

37. At fair value
Done for class
of assets
Increase
Decrease
Disclosed as part
of Equity as
“Revaluation
Surplus”
If Credited to P&L
Before, Debit to
that extent
Adjusted
against existing
“Revaluation
Surplus”
Credited to
Income
statement
Revaluation Model
37 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

38. Revaluation Model
38 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Reval. Surplus Asset P&L (Income) Asset
P&L (Income)
Reval. Surplus
Asset P&L (Income)
Reval. Surplus
Asset
Upward Revaluation - Initial Downward Revaluation - Initial
Downward Revaluation - Subsequent Upward Revaluation - Subsequent

39. Depreciation
39 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
PPE A/c
Asset xxx
+/- yyy

40. Depreciation
Systematic allocation of the depreciable amount
of an asset over its useful life.
◦Depreciable Amount = Cost – Residual Value
◦Useful Life = Period or Production
◦Systematic Basis = Depreciation Method (SLM, WDV or
Units)
◦Residual value and useful life to be reviewed at end of
each financial year
40 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

41. Component Approach
◦Each part of an item of PPE with a cost that is significant
to total cost shall be depreciated separately.
◦An entity shall allocate total cost to significant parts of an
asset and depreciates separately each such part.
◦More than one significant parts can have same useful life
and depreciation method such parts may be grouped in
determining the depreciation charge.
Depreciation
41 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

42. Particulars Allocated cost Residual value Useful life Depreciation
Keel 120,000,000 6,000,000
25
4,560,000
Bridge 70,000,000 10,500,000 2,380,000
Bulkhead 90,000,000 9,900,000
20
4,005,000
Propulsion system 30,000,000 3,000,000 1,350,000
Decks 100,000,000 5,000,000
15
6,333,333
Boiler 10,000,000 1,000,000 600,000
Refrigeration system 20,000,000 4,000,000
11
1,454,545
Fresh water generator 10,000,000 1,000,000 818,182
Total 45,00,00,000 4,04,00,000 2,15,01,060
Component Approach (Example)
42 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

43. Depreciation
“The depreciation charge for each period shall be
recognized in profit or loss unless it is included in
the carrying amount of another asset”
If future economic benefits are embodied / absorbed in
producing another assets than the depreciation charge
constitutes part of the cost of the other asset and is
included in its carrying amount.
For example, the depreciation of manufacturing plant and equipment
is included in the costs of conversion of inventories (Ind AS 2).
43 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

44. When to Start?
Depreciation begins when the asset is available for
use i.e. when it is in the location and condition
necessary for it to be capable of operating in the
manner intended by management.
44 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

45. When to Start?
Purchase Cost Direct Attributable
Costs
Initial estimate of
dismantling, removal and
site restoration costs
January, 2016 March, 2026
March, 2016
Capitalize
Depreciate
45 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

46. Depreciation is recognized despite fair value
exceeding carrying cost, unless residual value
exceeds carrying cost.
◦Where residual value increases to an amount equal to or
more than carrying cost, there is no depreciation charge
till the residual value reduces

Other Issues
RV

BV/CA

RV

BV/CA

Depreciate Do not Depreciate
46 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

47. 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 Ind AS 105; and
◦the date that the asset is derecognized.
47 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

48. Shall reflect the pattern in which the asset’s economic
benefits are expected to be consumed
Method applied to be reviewed at end of each financial year
Method selected is to be applied consistently unless there is
a change in the expected pattern of consumption of
economic benefits from the asset
Change in method of depreciation is to be treated as a
change in the estimate (Ind AS 8) (As against change in
accounting policy as per current AS 6)
Depreciation Method
48 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

49. Accounting for Accumulated
Depreciation on Revaluation
Two ways are:
1.Accumulated Depreciation to be restated
proportionately with the change in the gross carrying
amount of the asset so that the carrying amount of the
asset after revaluation equals its revalued amount.
49 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

50. Accounting #1
Asset A/c Depreciation Reserve A/c
P&L A/c Revaluation Surplus A/c
Bank Rs. 100 P&L Rs. 10
P&L Rs. 10
Dep. Res. Rs. 10
Dep. Res. Rs. 10
Asset A/c Rs. 50
Original Cost of Asset = Rs. 100
Revalued Amount = Rs. 120
P&L Rs. 10
Rev. Res Rs. 50
Dep. Res. Rs. 10
Cost = Rs. 100 CA = Rs. 80
Cost = ? CA = Rs. 120
Cross Multiply: 100 x 120 = Rs. 150
80
Dep. Res. Rs. 10
Revised Depreciation = 150 x 10% x 2 = Rs. 30
50 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

51. Accounting for Accumulated
Depreciation on Revaluation
2.Accumulated Depreciation to be eliminated against the
gross carrying amount of the asset and the net amount
restated to the revalued amount of the asset.
51 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

52. Accounting #2
Asset A/c Depreciation Reserve A/c
P&L A/c Revaluation Surplus A/c
Bank Rs. 100 P&L Rs. 10
P&L Rs. 10
Dep. Res. Rs. 10
Dep. Res. Rs. 10
Asset A/c Rs. 40
Original Cost of Asset = Rs. 100
Revalued Amount = Rs. 120
Asset Rs. 20
Rev. Res Rs. 40
Dep. Res. Rs. 20
Net Carrying Amount = Rs. 100 – Rs. 20 = Rs. 80
Revalued Amount = Rs. 120
Increase is Gross Amount = Rs. 120 – Rs. 80 = Rs. 40
52 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

53. Accounting for Revaluation Surplus
53 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Balance in Revaluation Surplus may be transferred to
Retained Earnings on disposal of asset.
However, some of the surplus may be transferred as the
asset is used by an entity in proportion to the depreciation
charged. However, transfers from revaluation surplus to
retained earnings are not made through profit or loss.
Such accounting will result in lower Profits as depreciation
on revalued portion is not routed through P&L A/c.

54. Accounting #Revaluation Surplus
Asset A/c Depreciation Reserve A/c
P&L A/c Revaluation Surplus A/c
Bank Rs. 100 P&L Rs. 10
P&L Rs. 10
Dep. Res. Rs. 10
Dep. Res. Rs. 10
Asset A/c Rs. 40
Asset Rs. 20
Rev. Res Rs. 40
Dep. Res. Rs. 20
Other Comprehensive Income
Rev. Res. Rs. 2
Depr. on Revalued Gr. C.A. = Rs. 12
(Rs. 120 x 10%)
Depr. on Original cost = Rs. 10
(Rs. 100 x 10%)
Difference = Rs. 02
Gen Res. Rs. 2
54 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Dep. Res. Rs. 12
P&L Rs. 12

55. Impairment & De-recognition
REMOVING A RECOGNIZED ITEM
55 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
PPE A/c
Asset xxx
+/- yyy

56. Impairment
To determine whether the item of PPE is impaired
or not Ind AS 36 is to be applied.

56 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

57. De-recognition
Upon disposal (Sold or Entering into Finance Lease)
OR
When no future economic benefits are expected
from its use or disposal
Resultant gain or loss is included in the profit and
loss statement wherein gain is not classified as
‘revenue’
57 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

58. Disclosure
58 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
PPE A/c
Asset xxx
+/- yyy
Notes: …?

59. Disclosures
59 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
For each class of property, plant, and equipment,
disclose:
◦basis for measuring carrying amount –Cost or Revaluation
◦depreciation method(s) used
◦useful lives or depreciation rates
◦gross carrying amount and accumulated depreciation and
impairment losses

60. Disclosures
60 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Reconciliation of the carrying amount at the
beginning and the end of the period, showing:
◦Additions / disposals
◦Acquisitions through business combinations
◦Revaluation increases or decreases
◦Impairment losses / reversals of impairment losses
◦Depreciation
◦Net foreign exchange differences on translation
◦Other movements

61. Thank You
CA Pranav A. Joshi
Partner
P. G. Joshi & Co., Chartered Accountants
www.pgjco.com