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Ind AS 16

CA. ARUP TANTI 4th April’2015


Ind AS 16

• Objective of Ind AS 16
• Scope
• Definition and Recognition of (PPE)
• Measurement at Recognition
• Subsequent costs and PPE
• Measurement after recognition
• Depreciation and Component
• De-recognition
• Disclosure
• Comparison with Ind AS 16 Vs AS 10

• Prescribe the
accounting treatment
for property, plant
and equipment.

• So that users of the financial statements can

discern information about an entity’s
investment in its property, plant and
equipment and the changes in such

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
• 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.

Definition and Recognition of PPE 06

Definition (para 6) Recognition criteria (para 7)
Property Plant Equipment The cost of an item of PPE shall be
(PPE) are tangible items that: recognised as an asset if, and only if :

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

 Stand-by equipment and servicing equipment are

recognised as PPE if recognition criteria is met,
Otherwise, such items are classified as
inventory.(para 8)

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.

 Situation 1: If a company occupies a premises but rents out

certain floors to other companies then what will happen?

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.

 Situation 2: If a building is rented by a subsidiary to Holding

Company then what will be treatment of building?
The building will be classified as an investment property in the individual accounts, but
will be classified as property ,plant and equipment per Ind AS 16 in the consolidated
financial statements.

Recognition of PPE 08
• What will happen if probable future economic benefits
associated with the item will not flow to the entity

Example is Safety equipment: As per Para 11 of Ind AS 16, Acquisition

of such PPE although not directly increasing the future economic
benefits of any particular existing item of PPE, may be necessary for
an entity to obtain the future economic benefits from its other assets
and hence qualify for recognition as assets.

However, the resulting carrying amount of such an asset and

related assets is reviewed for impairment in accordance with
Ind AS 36, Impairment of Assets.

Measurement at recognition 09
Examples of directly attributable
costs (para 17)

• Costs of employee benefits

• Cost of site preparation
 An item of property, plant and • Initial delivery and handling costs
equipment that qualifies for • Installation and assembly costs
• Trial run
recognition as an asset shall be • Professional Fees
measured at its cost.(para 15)
Examples of costs that are NOT costs
Elements of Cost: (para 16) of PPE: (para 19 & 20)
• Purchase price , non-refundable duties,
taxes net off discounts and rebates • costs of opening ceremony of a new
• Any costs directly attributable to facility or introducing a new product
bringing the asset to the location and • costs of conducting business in a new
condition necessary for its intended use location
• Admin and general overheads
• The initial estimate of the costs of • Initial operating losses
dismantling and removing the item and • Costs of relocating or reorganising
restoring the site on which it is located entity’s operations

Measurement at recognition 10
 Incidental operations need not be capitalised if
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.

The cost of a self-constructed asset 11
This is also determined using the
same principles as for an acquired
asset. (para 22)

 If an entity makes similar assets for sale in

the normal course of business, the cost of
the asset is usually the same as the cost of
constructing an asset for sale. (ref Ind
 Therefore, any internal profits are
eliminated in arriving at such costs. Example:
 The cost of abnormal amounts of wasted Company A is Car manufacturer,
material, labour, or other resources and suppose cost incurred by it
incurred in self-constructing an asset is for manufacturing a car for sale is
not included in the cost of the asset Rs.10 lakhs and selling price of
the car is Rs. 12 lakhs then Rs. 10
 Interest cost may also form part of
lakhs will be the cost of Car held
carrying amount of self constructed assets as PPE, if it fulfils the recognition
if it meets the criteria set in Ind AS 23 criteria of PPE.
Borrowing Cost.

Other issues in determination of

Cost of PPE
• The cost of an item of PPE is the cash price equivalent at
the recognition date.(para 23)
• Beyond normal credit terms- the
difference between the cash price
equivalent and the total payment is
recognised as interest over the period of
credit unless such interest is capitalised
in accordance with Ind AS 23
• Transaction of Barter
exchange -If the acquired
item is not measured at
fair value, its cost is
measured at the carrying
amount of the asset given
up.(para 24)

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.

Subsequent costs and PPE 14

 If recognition criteria of PPE met as per para 7, the cost added to the
carrying amount of PPE.(para 12)

 Day to day servicing costs –Repairs and Maintenance –to be taken to

Profit or Loss. (para 12)

 Cost of replacing part if the recognition criteria are met is to be taken

to PPE, while the carrying amount of those parts that are replaced is
to be derecognised. (para 13)
e.g. -aircraft interiors such as seats and galleys may require
replacement several times during the life of the airframe.

 A condition of continuing to operate an item of PPE may be

performing regular major inspections , such cost is recognised in the
carrying amount of PPE i.e. major overhauling &inspection cost are
capitalised if they satisfy the recognition criteria and after
derecognising the previous inspection charges available in remaining
in carrying amount. (para 14)

Measurement after recognition 15
choice of models
(shall choose either of two)(para 29)

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)

 Revaluations shall be made with sufficient regularity. (para 31)

 If an item of PPE is revalued, the entire class of Such PPE to which that
asset belongs shall be revalued.(para 36)

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

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

Recognise to Other Remaining

Income Recognise to

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

Carrying Value (170,000) (330,000)

230,000 (80,000)

The gain on Building ‘A ‘will be credited to the revaluation surplus in OCI.

The loss on Building ‘B’ will be debited to the statement of profit or loss expenses
because the company do not have a balance on the revaluation surplus in respect of
building B.

We make an overall Dr to fixed assets is (230,000-80,000)=150,000.

Accounting for Revaluation Model 18

Example : Revaluation Surplus
Binkie Co has an item of land carried in its books at ` 13,000.Two Years ago a
slump in land values led the company to reduce the carrying value from
`15,000.This was taken as an expense in profit or loss . There has been a surge
in land prices in the current year , however, and the land is now worth
`20,000. Account for the revaluation in the current year.

The double entry is :

DEBIT Asset value (under financial statement) ` 7,000

CREDIT Profit or Loss ` 2,000

CREDIT Revaluation Surplus ` 5,000

Note : The Credit to the revaluation surplus will be shown under “Other Comprehensive
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.

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.

• Frequency of revaluations: (para 34)

- depends upon the changes in fair values of revalued PPE item
- fair value of a revalued asset differs materially from its carrying
- Item of PPE experience significant and volatile changes in fair
- If no significant changes in values noticed then revaluation can
be done within a period of three or five years.

• Revaluation surplus shall be transferred to retained

earnings if the revalued asset is derecognized. (para 41)

Depreciation & Component accounting 20

• Depreciation is the systematic allocation of the depreciable amount of an
asset over its useful life. (para 6)

• Depreciable amount is the cost of an asset, or other amount substituted for

cost, less its residual value. (para 6)

• 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)

• The depreciable amount of an asset shall be allocated on a systematic basis

over its useful life. (para 50)

• Depreciation of an asset begins- when it 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. (para 55)

• Depreciation of an asset ceases (para 55): at the earlier of the date asset
 is classified as held for sale or
 is derecognised

Depreciation & Component accounting 21
• The residual value and the useful life of an
- 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)

• Any Change in useful life, residual value and depreciation method

shall be treated as change in estimates and accounted
prospectively.(para 51 & 61)

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

Depreciation & Component accounting 22

Component approach:
• Does not prescribe a unit measure.
• Each part of PPE with a cost that is significant
in relation to the total cost of the item shall be
depreciated separately.(para 43)
E.g. -It may be appropriate to depreciate separately the
airframe and engines of an aircraft, from other parts.

How to determine components:

 requires a careful assessment of the facts and
 These assessments would include, the
following factors:
1. comparison of the cost allocated to the
component to the total cost of the property,
plant and equipment; and
2. Materiality on depreciation expense
between component approach and clubbing

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)

• Generally Land has an unlimited useful life and therefore is not

depreciated. But if the cost of land includes the costs of site
dismantlement, removal and restoration, that portion of the land asset is
depreciated over the period of benefits obtained. (para 59)

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)

• Compensation for impairment (para 65):

compensation from third parties for items of PPE that were impaired,
lost or given up is included in determining profit or loss when it becomes
• Accounting Treatments (para 66):
I. impairments of items of PPE are recognised in accordance with Ind
AS 36
II. derecognition of items of PPE retired or disposed of is determined
in accordance with this Standard
III. compensation from third parties for items of PPE that were
impaired, lost or given up is included in determining profit or loss
when it becomes receivable
IV. the cost of items of PPE restored, purchased or constructed as
replacements is determined in accordance with this Standard.

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.

• The gain or loss shall be included in profit or loss (para 68)

• Gain / Loss from derecognition (para 71)

Net disposal proceeds xxxx

Less: The carrying amount of the item xxxx
Gain/(loss) xxxx

Disclosure 26
Disclosure requirement as per para 73

(a) the measurement bases used for determining the gross carrying amount;

(b) the depreciation methods used;

(c) the useful lives or the depreciation rates used;

(d) the gross carrying amount and the accumulated depreciation

• Reconciliation of the carrying amount at the beginning and end of the period showing:
(i) additions;
(ii) assets classified as held for sale

• Acquisitions through business combinations

• Increases or decreases resulting from revaluations
• Impairment losses and impairment losses reversed
• Depreciation
• The net exchange differences arising on the translation of the financial statements from
the functional currency into a different presentation currency
• other changes.

Disclosure 27
Disclosure requirement as per para 74

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 requirement as per para 75

(a) depreciation, whether recognised in profit or loss or as a part of the cost

of other assets, during a period; and
(b) accumulated depreciation at the end of the period.

Disclosure 28
Disclosure requirement as per para 76

If there is any changes in estimate and methods which requires disclosure in

accordance with Ind AS 8 following areas may require disclosure :

(a) residual values;

(b) the estimated costs of dismantling, removing or restoring items of PPE ;
(c) useful lives; and
(d) depreciation methods.

Disclosure requirement as per para 77

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.

Transitional provision under Ind AS 101
Deemed Cost (Ind AS 101) :

An amount used as a surrogate for cost or depreciated cost

at a given date. Subsequent depreciation or amortisation
assumes that the entity had initially recognised the asset or
liability at the given date and that its cost was equal to the
deemed cost.
With respect to PPE deemed cost is : either of the three

- Fair value at the date of transition to Ind ASs

- Previous GAAP revaluation at or before the date of
transition to Ind ASs
- carrying value of all PPE as at the date of transition to
Ind ASs measured as per previous GAAP after making
necessary adjustment for any decommissioning

Comparison with Ind AS 16 Vs AS 10 30

Ind AS 16 AS 10 & AS 6
Component approach

IAS 16 mandates component accounting. Each major part of an item

Component approach is present but is more of
of property plant and equipment with a cost that is significant in
relation to the total cost of the item is depreciated separately.
Cost & Revaluation Historical cost or revalued amounts are used. Historical cost or revalued amounts are used. No specific
Regular valuations of entire classes of assets are required when requirements on frequency of revaluation. Revaluation for the
revaluation option is chosen. whole class of assets is not required.
Depreciation on Revaluation Depreciation on revalued portion may be recouped out of
revaluation reserve, thus reserve reduces over the period and
Depreciation on revalued portion is debited to income statement
depreciation charge represent the original cost
without recouping out of revaluation reserve.
Revaluation Reserve

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.

Industry Impact Analysis – Ind AS 16
Property Plant & Equipment 31
Commodity manufacturing Industry – Crude, Ore, Power

• various facilities that can be identified as first level components such as

Water treatment, Gas tapping, Conveyors, Turbines, Rooters, Shafts,
Tankages , Moulds, Furnaces etc.
• One of the major component is pipelines which have material value and
different useful life.
• Second level components will need a detailed analysis of each identified
first level component with their individually assessed useful lives. Each
unit will need separate line items for identification.
• Entities will need to estimate its asset retirement obligations at the time
of initial capitalisation.
• Another impact will be on account of capital repairs that are incurred
during shut down, cell realignment, etc. This will be capitalised under
fixed assets and amortised till the next overhauling date.
• By virtue of assessment of useful life, entities get a chance to increase
the useful life for depreciating the assets to its true useful lives.

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


Changes in Existing Decommissioning,

Restoration and Similar Liabilities

• Under cost model Changes in decommissioning liability shall be added

to or deducted from the cost of related asset in the current period

• 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 :

o a change in the estimated outflow

o a change in the current market-based discount rate
o an increase that reflects the passage of time