PROPERTY PLANT & EQUIPMENT

NAS 16

ANURAG WAGLE
DEFINITION OF PROPERTY PLANT & EQUIPMENT (PPE)
Property Plant and Equipment are tangible items that:
are held for
• use in the production or supply of goods or services
or,
• rental to others
• for administrative purposes
• Are expected to be used during more than 1 period
Factory Road constructed on public land
Item can be of 3 types
(1) Purely Tangible- NAS 16
(2) Purely Intangible- NAS 38
(3) Mixed- Depends on which element is significant
(a) In case of lease asset- recognition will be as per NAS 17 and
subsequent recognition as per NAS 16
(b) In case of Investment Property- Recognition as per NAS 40
and subsequent recognition as per NAS 16
Can Factory be capitalized as PPE?
Can Road be capitalized as PPE?
SCOPE
Case I- “NAS 16 does not apply” Case II- “Other NAS applies & NAS 16 also Case I- “Only NAS 16
applies” apply”
• Non-current asset held for sale and
discontinued operation (NFRS 5) (a) Leased Asset (initial recognition- NAS 17 & All PPE other than mentioned in
• Biological assets (NAS 41) Subsequent recognition NAS 16) Case I & Case II
• Exploration & Evaluation asset (NFRS 6) (b) Investment property (initial & subsequent
• Mineral Right & Mineral Reserve recognition- NAS 40 & Depreciation- NAS 16)

Apple hanging in the tree is an

“agricultural produce” as per NAS 41

When apple
is harvested it
becomes
inventory and
now will be
covered by
Tree is a “Bearer Plant” as per NAS 16 NAS 2
RECOGNITION
According to NAS 16 the cost of an item of Property, Plant and Equipment shall be recognized if following 2
conditions are satisfied:
Condition 1- Future economic benefits (FEB) associated with the item are probably to flow to the entity
Condition 2- Cost of the item can be measured reliably
An entity uses this recognition principle to evaluate all costs incurred related to Property, Plant and Equipment
whether

• costs incurred initially (at the time of recognition) to acquire or construct an item of PPE or

• Costs incurred subsequently (after recognition and brought into usable condition) to add to, replace part of,
or service it.

Expenditure on Machinery spares; stand by equipment; servicing equipment

If both the above condition of recognition criteria are met Apply NAS 16

If Either of the condition fails Apply NAS 2

 RECOGNITION OF SUBSEQUENT COST
(i) Repair & Maintenance Day to day repair & service cost are not included in PPE. It is a revenue expenditure

Some part of PPE may require replacement at regular interval. Eg- aircraft interior such as seats, replacing
(ii) Replacement of Parts
interior wall of the building

• At First Check the two recognition criteria

• If Recognition criteria is met then we need to
(i) De recognize the cost of old/replaced component if it has not been de recognized
(ii) Recognize the cost of new component

Carrying Amount of PPE XXXXXXXX

De-recognize carrying amount of replaced
Component (XXXXXXXX)
Recognize cost of new part XXXXXXXXX

Carrying Amount of PPE after replacement XXXXXXXXX

(iii) Major Inspection & Overhaul PPE may require major inspection regularly for identifying faults. In that case also

• At First Check the two recognition criteria

• If Recognition criteria is met then we need to
(i) De recognize carrying amount of previous inspection if it has not been de recognized
(ii) Recognize the cost of new inspection

Carrying Amount of PPE XXXXXXXX

De-recognize carrying amount of previous inspection (XXXXXXXX)
Recognize cost of new Inspection XXXXXXXXX

Carrying Amount of PPE after new inspection XXXXXXXXX

COMPONENT WISE RECOGNITION OF PPE
A complex PPE is segregated by significant parts. Accordingly, at the time of initial recognition costs are allocated to various components. An
entity may adopt the following policy for componentisation of PPE
(i) a component is separately identifiable and measurable, and can be separated from the complex asset;
(ii) the useful life of component is shorter than that of the main asset such that it requires replacement during the life of the complex
asset to which it belongs;
(iii) the cost of the component exceeds the capitalisation threshold of the entity;
(iv) the cost of the component is significant in relation to the total cost of the complex asset; and
(v) the useful life of the component is different from the complex asset such that failure to depreciate the component will create material
difference in depreciation charge.

When any of those components is replaced, carrying amount of the replaced component (i.e. old component) is
derecognised and new component is recognised. For this purpose each of the significant components is accounted
like an independent asset. Each such significant component is depreciated separately.
TREATMENT OF SPARE PARTS & STAND BY EQUIPMENT/SAFETY
EQUIPMENT
Type of spare parts Accounting Treatment
Major spares & stand by equipment To be recognized as PPE & depreciated over their
which are expected to be used for useful life
period over more than one accounting
periods
Spare parts & servicing equipment To be recognized as PPE & depreciated over the
which can be used only in connection periods not exceeding the remaining useful life of the
with a particular item of PPE (i.e non related asset.
interchangeable items)
Other items of spare parts & servicing Expense on use. Unused items form part of
equipment inventory.
Safety Equipment These items may be necessary for the entity to
obtain future economic benefits from its other
assets. For this reason they are recognised as assets.

Most of the time assets will be identified individually, but this will not be the case for smaller items, such
as tools, dies and moulds, may be aggregated and tested for recognition as PPE.
 COMMENT WHETHER FOLLOWING ITEMS CAN BE RECOGNIZED
AS PPE OR NOT
Case I
ABC Ltd. is setting up a new refinery outside the city limits ABC Ltd. under an understanding with local authorities also
construct a school, which will be subsequently handed over to be managed by an independent trust.Though ABC Ltd. Incurs
expenditure on the construction/development of the school, it will not have ownership rights and the assets will also be
available for use to the general public (however, preference will be given to employees of the Company).

Case II
Company A has exhibited certain rare and expensive paintings and sculptures for aesthetic purposes at entrance hall,
conference rooms.The entity does not trade in these items in the ordinary course of business.

Case III
A section of a mall is renovated by constructing a food court and gaming zone so as to increase the footfall in the mall. The
food court and gaming zone are expected to result in a significant increase in sales for the shops and outlets of the mall.
MEASUREMENT
It means amount or value at which PPE is Recorded. An item of property, plant and equipment that qualifies for
recognition as an asset should be initially measured at its cost

At Initial Recognition Subsequently

Case I: Cost Model
Case I: Separate Acquisition
Case II: Revaluation Model
Case II: Self Constructed Assets
Case III: Deferred Credit
Case IV: Exchange
 (A) SEPARATE ACQUISITION

Cost Included in PPE

(1) purchase price, including
➢ import duties
➢ non-refundable purchase taxes
➢ after deducting trade discounts and rebates. Examples of directly attributable costs are:
(a) costs of employee benefits (NAS 19) arising directly from the construction or acquisition of the
item of PPE;
(2) any costs directly attributable to bringing the asset to the (b) costs of site preparation;
➢ location and (c) initial delivery and handling costs;
➢ condition (d) installation and assembly costs;
(e) costs of testing whether the asset is functioning properly, after deducting the net proceeds from
necessary for it to be capable of operating in the manner selling any items produced while bringing the asset to that location and condition (such as samples
intended by management. produced when testing equipment) i.e., trial run production; and
(f) professional fees.
(3) the initial estimate of the costs of
➢ dismantling;
➢ removing the item; and
➢ restoring the site on which it is located
 (A) SEPARATE ACQUISITION

Income
Cost not Included in PPE
(to be reduced from cost of PPE or taken to P/L as income)
Examples of costs that are not costs of an item of
PPE are:
(a) costs of opening a new facility; (Startup Cost)
(b) costs of introducing a new product or service
(including costs of advertising and promotional Income from Incidental Compensation for damages
activities); activity Compensation for increased cost
(c) costs of conducting business in a new location or income may be earned through due to delay in construction
with a new class of customer (including costs of staff using a building site as a car
Deduct from Cost of PPE
training); and park until construction starts
(d) administration and other general overhead costs. These are not necessary to
bring an item to the location
and condition necessary for it
to be capable of operating in
the manner intended by
management
Self Constructed Asset
(1) We Apply same principle as we have discussed for separate
acquisition
(2) We have to eliminate internal profits if any
(3) Always Exclude Abnormal amount of wasted material, labour,
or other resources incurred in self-constructing an asset is not
included in the cost of the asset
Exchange of PPE
In Case of exchange of investment property, check 2 condition
(a) Does the transaction have commercial substance? (is there
change in pattern of economic benefit)
(b) Do we have fair value of asset acquired or given?
If answer to both the question is Yes -then record the
property acquired at Fair Value of such asset acquired
If answer to both above condition fails-
then record the property acquired at Book Value of such
asset given
Deferred Consideration
If payment is deferred beyond normal credit terms, the difference
between the cash price equivalent and the total payment is recognised as
interest over the period of credit.
Total Interest= Total Payment-Cash Price Equivalent
(a) If PPE is a qualifying asset- Capitalize interest upto the date asset is
available for intended use.
(b) If PPE is not a qualifying asset- charge to SPL over the period of
credit
Case study
Entity X has a warehouse which is closer to factory of Entity Y and vice versa. The
factories are located in the same vicinity. Entity X and Entity Y agree to exchange their
warehouses. The carrying value of warehouse of Entity X is Rs. 1,00,000 and its fair
value of Rs. 1,25,000. It exchanges its warehouse with that of Entity Y, the fair value of
which is Rs.1,20,000. It also receives cash amounting to Rs.5,000. How should Entity X
account for the exchange of warehouses?
checking 2 conditions:
(a) Does the transaction have commercial substance?
(b) Do we have fair value of asset acquired or given?
SUBSEQUENT MEASUREMENT-MEASUREMENT AFTER RECOGNITION
An entity shall choose either the cost model or the revaluation model as its accounting policy and should apply that
policy to an entire class of property, plant and equipment

Cost Model Revaluation Model

As per Cost Model we present PPE as follows: Historical Cost are revalued at its fair value at balance sheet date
Cost of PPE XXXXXX As per Revaluation Model we present PPE as follows:
(-) Acc. Depreciation (XXXXXX) Cost of PPE XXXXXX
(-) Acc. Impairment (XXXXXX) (-) Subsequent. Depreciation (XXXXXX)
Carrying Amount XXXXXXX (-) Subsequent. Impairment (XXXXXX)
Carrying Amount XXXXXXX

Frequency of revaluation depends upon changes in fair value are

significant or not.
(i) Fair value changes are significant- Annual revaluation
(ii) Fair Value changes are insignificant- Once in 3-5 years
OTHER IMPORTANT POINTS ON REVALUATION
 In the case of plant and equipment, fair value can also be taken as market value. Where a market value is not available, however, depreciated
replacement cost should be used.
 when an item of property, plant and equipment is revalued, the whole class of assets to which it belongs should be revalued.
 All the items within a class should be revalued at the same time, to prevent selective revaluation of certain assets.
 NAS 16 requires the increase to be credited to a revaluation surplus (ie part of owners' equity), unless the increase is reversing a previous
decrease which was recognised as an expense.
PPE A/C Dr…………..XXXXX
To SPL A/C……………………XXXXX (to the extent of previous revaluation loss recognized in SPL)
To Revaluation Reserve A/C…..XXXXX (Remaining Increase)
 For a decrease in value on revaluation. Any decrease should be recognised 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.
Revaluation Reserve A/C Dr………..XXXXX (To the extent of previous increase taken in revaluation reserve on same asset is available)
SPL A/C Dr……………………….....XXXXX (Remaining decrease in asset)
To PPE A/C Dr……………………………….XXXXX
Example: revaluation surplus
Kathmandu Co has an item of land carried in its books at Rs 13,000. Two years ago a slump in land values led the company to reduce the
carrying value from Rs 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 Rs 20,000. Account for the revaluation in the current year.
Solution
The double entry is:
DEBIT Asset value (statement of financial position) Rs 7,000
CREDIT Profit or loss Rs 2,000
Revaluation surplus Rs 5,000
Note: the credit to the revaluation surplus will be shown under 'other comprehensive income'.

Example: revaluation decrease

Let us simply swap round the example given above. The original cost was Rs 15,000, revalued upwards to Rs 20,000 two years ago. The value has
now fallen to Rs 13,000. Account for the decrease in value.
Solution
The double entry is:
DEBIT Revaluation surplus Rs 5,000
DEBIT Profit or loss Rs 2,000
CREDIT Asset value (statement of financial position) Rs 7,000
 CLASSES OF PPE
Paragraph 37 property, plant and equipment to which that asset belongs should be revalued. 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

Points to remember:
(1) Entity has to apply cost or revaluation model to entire class of PPE.
(2) For application of class of asset we do not distinguish between leased asset and owned asset
TREATMENT OF REVALUATION SURPLUS
Alternative I Alternative II

The revaluation surplus included in
equity in respect of an item of PPE
may be transferred directly to
retained earnings when
the asset is derecognised.
Each year excess depreciation is transferred from Revaluation
surplus to “Retained Earning” where excess depreciation is
Depreciation as per revalued amount XXXXXXX
(-) Depreciation as per original amount (XXXXXX)
Excess Depreciation XXXXXXX

Transfers from revaluation surplus to retained earnings are not made through profit or loss.
The effects of taxes on income, if any, resulting from the revaluation of property, plant and equipment are
recognised and disclosed in accordance with NAS 12 Income Taxes.
 PRESENTATION OF PPE AFTER REVALUATION
Alternative I- If asset are revalued then Alternative II- Eliminate Accumulated
adjustment in both cost and accumulated Depreciation
depreciation can be made.
Cost 500,000 600,000
Cost 500,000 X2 10,00,000
Less:Acc Dep (200,000) Nil
X2
Less:Acc Dep (200,000) (400,000)
Book Value 300,000 600,000
Book Value 300,000 600,000

Identify multiplying factor

which is 2 in this case
PPE A/C Dr……..100,000
PPE A/C Dr……..500,000
Acc Dep Dr……..200,000
To Acc Dep Cr………………200,000
To Revaluation reserve Cr……300,000
To Revaluation reserve Cr……300,000
DEPRECIATION
1) Depreciation of PPE depends on the following item: A depreciation method that is based on revenue that is
• Cost of PPE generated by an activity is not appropriate.
• Useful Life of PPE Method based on revenue generally reflects factors other than
• Scrap value of PPE at the end of useful life the consumption of the economic benefits of the asset.
• Method of depreciation For example, revenue is affected by other inputs and
processes, selling activities and changes in sales volumes and
2) There are various methods of charging depreciation prices.The price component of revenue may be affected by
• Straight Line Method inflation, which has no bearing upon the way in which an asset
• Written down value method is consumed.
• Unit of production method

3) An entity is required to review (mandatory) at the end

of each financial year
(a) Useful life
(b) Scrap & residual value If changed, regarded as change in accounting estimate. NAS 8 is
(c) method of depreciation applicable and are accounted prospectively
 4) The depreciation charge for each period shall be recognised in profit or loss unless it is
included in the carrying amount of another asset.

5) Depreciation begins when PPE is available for use

6) Depreciation Cease – At the earliest of the following

(i) De Recognition (Sale/ Woff) Therefore, depreciation does not cease when the
(ii) At the time in PPE is classified as held for sale in asset becomes idle or is retired from active use
accordance with NFRS 5 unless the asset is fully depreciated.

Cases where no depreciation is charged in a particular Year

(i) under usage methods of depreciation the depreciation charge can be zero while there
is no production.

(ii) The residual value of an asset may increase to an amount equal to or greater than the
asset’s carrying amount. If it does, the asset’s depreciation charge is zero unless and until its
residual value subsequently decreases to an amount below the asset’s carrying amount.
 DEPRECIATION ON COMPLEX ASSET
These are assets which are made up of separate components. Each component is separately depreciated over their useful life.
An aircraft could be considered as having the following components:
Cost Rs’000 Useful life
Exterior 20,000 20 years
Undercarriage 5,000 500 landings
Engines 8,000 1,600 flying hours
Depreciation at the end of the first year , in which 150 flights totaling 400 hours were made would then be:
Rs ’000
Exterior structure 1,000
Undercarriage (5,000 x 150/500) 1,500
Engines (8,000 x 400/1,600) 2,000
4,500
 DEPRECIATION ON OVERHAULS
Where an asset requires regular overhauls in order to continue to operate, the cost of the overhaul is treated as an additional component and
depreciated over the period to the next overhaul.

In the case of the aircraft above, we will assume that an overhaul is required at the end of year 3 and every
third year thereafter at a cost of Rs 1.2m. This is capitalised as a separate component. The depreciation for
year 4 (assuming 150 flights again) will therefore be:
Rs’000
Total as above 4,500
Overhaul (Rs1,200,000 / 3) 400
Total Depreciation 4,900
 DEPRECIATION ON REVALUED ASSETS
Revalued Amount will be depreciated over the remaining useful life
Ramro Co bought an asset for Rs10,000 at the beginning of 20X6. It had a useful life of five years. On 1 January 20X8 the asset was revalued
to Rs12,000.The expected useful life has remained unchanged (ie three years remain). Account for the revaluation and state the treatment
for depreciation from 20X8 onwards.
Solution
On 1 January 20X8 the carrying value of the asset is
Cost of Asset Rs10,000
Less: Depreciation for 2 years Rs 4,000
(2 × Rs10,000 / 5).
Rs 6000
For the revaluation:
DEBIT Accumulated depreciation Rs 4,000
DEBIT PPE Rs 2,000
CREDIT Revaluation surplus Rs 6,000
The depreciation for the next three years will be Rs12,000/3 = Rs 4,000, compared to depreciation on cost of Rs 10,000 / 5 = Rs 2,000. So
each year, the extra Rs 2,000 can be treated as part of the surplus which has become realised:
DEBIT Revaluation surplus Rs 2,000
CREDIT Retained earnings Rs 2,000
This is a movement on owners' equity only, not an item in profit or loss
 DE RECOGNITION OF ASSET
When derecognition occurs?
Carrying amount of an item of property, plant and equipment shall be derecognized:
• disposal (such as sales)
• When no future benefits are expected from its use or sale i.e. scrap
Gain/loss on derecognition – Accounting Treatment
Gain or loss arising from derecognition shall be included in profit and loss account in the period such derecognition occurred. Gain cannot be
classified as revenue. Gain or loss will be calculated as the difference between the net disposal proceeds and the carrying amount of an asset.

Disposal
Disposal can occur in the shape of:
• Sale
• Lease
• Donation
• Any event requiring derecognition e.g. theft or natural loss
Third party compensation – Accounting Treatment
If that is compensated by third party then carrying amount of asset and the compensation received should be transferred to income statement
separately
DISCLOSURE REQUIREMENT

Following disclosures should be made

(1) Measurement base
(2) Depreciation method used
(3) Useful life or Depreciation method used
(4) Details of balances of following items at the beginning and end of the financial
period
(a) Gross amount of PPE
(b) Accumulated Depreciation
(c) Accumulated Impairment Losses
(d) Net Amount of PPE
Reconciliation of following at the beginning and end of financial period
(a) Addition of PPE
(b) PPE classified as held for sale (NFRS 5)
(c) Acquisition of PPE by business combination
(d) Impairment Losses
(e) Reversal of impairment losses
(f) Depreciation
(g) Exchange differences if any
(h) Any other changes