B.

Com (Hons & General)

Study Material

Semester- VI

Year- 2020

Subject- FINANCIAL REPORTING AND FINANCIAL STATEMENT ANALYSIS

Paper: DSE 6.1 A

Topic- Property Plant and Equipment (IND AS 16)

Prepared by- CA RUPASREE BASUMALLIK(RBM)

Ind AS-16:Property Plant and Equipment(PPE)
>Objective > Measurement
>Scope > Depreciation
> Definition >Impairment
>Recognition >De-recognition

❖ Objective: The objective of this standard is to prescribe the accounting treatment for property, plant
and equipment so that users of the financial statements can get information about an entity’s
investment in its property, plant and equipment and the changes in such investment. The objectives
of Ind AS 16 are:

(a) Recognition of Assets

(b) Determining the carrying amount of the asset
(c) Depreciation charged
(d) Impairment losses to be calculated

❖ Scope: This standard shall be applied in accounting for property, plant and equipment except when
another standard requires or permits a different accounting treatment.
All Except ---
(a) Asset held for sale (Ind AS-105)
(b) Biological Assets related to agricultural activity (Ind AS-41)
(c) Recognition and measurement of exploration and evaluation assets (Ind AS-106)
(d) Mineral Rights, Mineral reserves such as oil, natural gas and similar Non-regenerative
resources.

❖ Definition: Plant, Property, Equipment (PPE) are -

(a) Tangible Assets
(b) Assets held for use
▪ Production / supply of goods(machinery)
▪ Rendering of services (Classroom used for teaching purpose)
▪ Administrative (office computer)
▪ Rental to others (except investment property ) (i.e. asset held for earning rental
income from any investment property, then it is not PPE)

(c) And the asset is expected to be used for more than one accounting period.

Note: Spare parts, standby equipment qualifies the definition of PPE as per Ind AS–16, then, it will be
considered as PPE. Otherwise, the valuation of these will be as per Ind AS-2, Inventories.

❖ Recognition of PPE:The cost of an item of PPE shall be recognised as an asset if

(a) Cost of the asset shall be reliably measured.
(b) Future economic benefit from the asset should be flown to the entity.

➢ Recognition of cost - {(both – (i) Initial cost: Cost incurred initially to acquire or
construct an item of PPE (ii) Subsequent Cost: Cost incurred subsequently to add
to , replace part of or service it.)}
The degree of certainty attached to the flow of future economic benefits must be assessed. This should be
based on the evidence available at the date of initial recognition (usually the date of purchase). The entity
should thus be assured that it will receive the rewards attached to the asset and it will incur the associate
risks, which will only generally be the case when the rewards and risks have actually passed to the entity.
Until then, the asset should not be recognised.
 ➢ Not give economic benefit directly.
E.g. – Chemical treatment machine in a sewerage plant. But consideredas PPF.

➢ Day today repair – charged to P/L

➢ Replacement – Capitalized

E.g. -- Bike given for overhauling (engine replaced)

Old Engine New Engine

Derecognised in c/f carrying amount Recognized -cost

➢ Major Inspection – Capitalized

E.g. – Air craft engine inspection (say after every 3 years – Rs.6,00,000)
For every year – 600000 = Rs.2,00,000 Capitalized.
3 years

❖ Measurement:
PPE once recognised as an asset will be measured at cost. Cost of an item of PPE is the cash
price equivalent at the recognition date. 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 unless such interest is capitalised in accordance with Ind AS
23.

Initial Cost

(1)Purchase Price (2) Initial Estimate of cost of

(-) Trade Discount/ Rebate dismantling removing the item &restoring
(+) Import Duties the site on which it located.
(+) Non-refundable taxes incurred
at the time of acquisition

(3) Any cost which is directly attributable to the asset on PPE:

E.g.- > Cost of site preparation

> Delivery & handling charges (Transport)
> Installation and assembly cost
> Testing Cost (To check proper functioning of the PPE)
> Professional fees
> Employee benefits of those involved in the construction or acquisition
of an asset
E.g. - Samples produced while testing an equipment.

▪ Cost excluded from IndAS-16:

(a) Cost of opening a new facility
(b) Cost of introducing a new product in the market
E.g. – Cost of advertising or promotional activities.
(c) Cost of conducting a business in a new location with new class of customers.
E.g. -- Staff training cost
(d) Administrative and other general overheads.
 ▪ Costs excluded from the carrying amount of an item of PPE:
(a) Cost incurred while an item capable of operating in a manner intended by the management
has yet to be brought into use i.e. operated at less than its full capacity.
(b) Other operating losses such as loss of demand when the product is just introduced in the
market.
(c) Cost of re-locating or re-organising the part of or all of the entity’s business or operation.

Note:
1)Self Constructed Asset: Cost of self constructed asset is determined using the same principles as for an
acquired asset. Therefore any internal profits are eliminated in arriving at such costs.
2) A transfer from one division to another division of an organisation at a transfer price including profit
margin. In such a case we will only consider the cost of transfer and the profit included transfer price.
3)Cost of abnormal amounts of wasted material, labour or other resources incurred in self constructing an
asset is not included in the cost of the asset.

Note:
Asset Exchange Transaction: One or more items of PPE may be acquired in exchange for :
• A non-monetary asset or assets
• A combination of monetary and non-monetary assets
The cost of such an item of PPE is measured at fair value unless: (a) The exchange transaction lacks
commercial substance or, (b) The fair value of neither the asset received nor the asset given up is reliably
measurable.

Measurement Model (Subsequent)

Cost Model Revaluation Model

Cost of PPE - Accumulated depreciation {Revalued cost - Accumulated depreciation

- Accumulated Impairment less on Fair value
= Balance amount c/f (on day revalued)
- Accumulated Impairment loss }
= Balance amount c/f

Note: Revaluation should be made with sufficient regularity to ensure that the carrying amount does not
differ materially from that which would be determined using fair value at the end of the reporting period.

❖ Depreciation: Depreciation is the systematic allocation of the depreciable amount of an asset over its
useful life. The depreciable amount of an asset should be determined after deducting its residual
value from its carrying amount.

The depreciation charged for a period is recognized in P/L a/c.

Depreciation

Residual Value < Carrying Amount Residual Value > Carrying Amount Asset is hold for sale

Depreciation charged Zero Depreciation Depreciation Ceases

 ➢ Depreciation begins when the asset is available for use.
➢ Depreciation ceases when the asset is held for sale and the date when asset is
derecognised. Depreciation does not cease when the asset becomes idle or retire from
its active use.

Depreciation Method

SLM WDVM Units of production

Constant Charge Decrease in Charge [Depreciation is based on the

expected use of asset]

❖ Derecognition: The carrying amount of an item of PPE shall be derecognised in two situations:

➢ Disposal of asset (sold)

➢ No future benefit is expected from the asset

Ways of Disposal: i) By sale

ii) By entering into Finance lease
iii) By donation
Gains and Losses arising from the derecognition of an item of PPE shall be included in Profit and Loss
account.

Case Study I:
A Co. produces fertilizers at various manufacturing units. The manufacturing units uses
various technologies for manufacture of fertilizers. The Co. has machinery opens which are
customised by the supplier as per the requirements of the Co. and are expected to be used for
more than one period. How should machinery spares be accounted for as per IndAS -16?

Solution:
As per Paragraph – 8 of Ind AS-16, items such as spare parts, stand by equipment and
servicing equipment are recognised in accordance with this Ind-AS when they meet the
definition of PPE. Otherwise, such items are classified as inventories. Paragraph 6 of Ind AS-16
]provides that PPE are tangible items that:
(i) Are held for use in the production or supply of goods on services, for rental to others or
for administrative purposes and
(ii) Are expected to be used for more than one accounting period.

In accordance with above, in the given case the machinery spares are held for use in the
production of goods & are expected to be used for more than one period. Hence, the same
should be capitalized as PPE in accordance with Ind AS-16 irrespective of whether it is
procured at the time of purchase of equipment or subsequently.

Case Study II:

A section of a mall is renovated by constructing a food court and gaming zone so as to increase
the foot fall in the mall. The food court and the gaming zone are expected to result in a
significant increase in sales for the shops and outlets. Whether the cast of construction of food
and gaming zone should be capitalized as PPE or expensed off in the statement of Profit and
Loss?
 Solution:
Paragraph 7 of Ind AS16 requires that the cost of an item of property , plant and equipment
shall be recognised as an asset if and only if :

(a) It is probable that future economic benefits associated with the item will flow to the entity; &
(b) The cost of the item can be measurable reliably.

Further as per paragraph 10 of Ind AS16, an entity evaluates under this recognition principle all its
PPE cost at the time they are incurred. These costs include cost incurred initially to acquire or construct an
item of PPE and also costs incurred subsequently to add to replace part of, or service it.

In view of the above, since it is probable that construction of food court and gaming zone will flow
future economic benefit to the entity in the form of increase in sales and costs can also be measured reliably.
So the subsequent cost of construction of food court and gaming zone should be capitalized in the cost of
mall as an item of PPE.

Case Study III:

On 1.4.18, X Ltd. began the construction of a new factory. Costs relating to the factory incurred
in the year ended 31.3.19, are as follows:

Particulars Amount
Cost of dismantling the existing structure on the site 500
(demolition cost)
Material consumed to construct the factory 6000
Employment cost (Note 1) 1800
Other costs directly related to the construction (Note-2) 1200
General administration O/H (not involved in factory 600
construction)
Architects and consultant’s fees directly related to the 400
construction
Cost of re-locating staff who are to work at the factory. 300
Cost relating to the formal opening of the factory. 200

Note-1:
The factory was constructed in 8 months ended on 30.11.18 and it was brought into use on
31st December 2018. The employment costs are for 9 months to 31.12.18. The employees
were engaged in the construction related activities.

Note-2:
Other costs directly related to the construction include an abnormal cost of Rs.200 in respect
of repairing damage.
What will be the initial carrying value of the factory building?

Solution:
The cost of an item of PPE comprises:
(a) Its purchase price including duties and non-refundable taxes after deducting trade
discounts and rebates.
(b) Any costs directly attributable to bring the asset in present location and condition
necessary for it to be capable of operating in the manner intended by the management.
 (c) The initial estimate of the cost of dismantling and removing the item and restoring the site
on which it is located, the obligation for which an entity incurs either when the item is
acquired or as a consequence of having used the item during a particular period for
purposes other than to produce inventories during that period.

Examples of Directly attributable costs –

(a) cost of employee benefit arising directly from the construction or acquisition of the item of
PPE
(b) cost of site preparation
(c) initial delivery and handing costs
(d) installation and assembly cost
(e) cost of testing whether asset is functioning properly
(f) professional fees

The above costs are not included in Ind AS-16 (excluded)

(a) cost of opening a new facility
(b) cost of introducing a new product/service
(c) cost of conducting business in a new location/ new class of customer
(d) administration and other general overhead costs

In accordance with the above paragraphs, the initial carrying value of the factory is computed as below:
Particulars Reasons Amount Amount
Capitalized
(1) Cost of dismantling the existing Cost of dismantling and site 500 500
structure preparation cost will be
recognised under PPE because
of cost of getting the asset
ready to use in the manner
intended by the management.
(2) Material consumed to construct the Direct attributable cost 6000 6000
factory.

(3) Employment Cost Employment cost for the 1800 1800 x 8

period of 8 months are directly 9
attributable. Therefore, cost to = 1600 [Note1]
be capitalized would be 1600.
(4) Other costs directly related to the Directly attributable cost 1200 1200-200
construction excluding the abnormal cost. = 1000 [Note 2]
(5) General administration O/H General O/H costs are not a 600 Nil
cost item under PPE.
(6) Architects and consultant fees Directly attributable cost. 400 400
directly related to the construction.
(7) Cost of relocating staff who are to This is not required for getting 300 Nil
work at the factory the asset ready to use.
(8) Cost relating to the formal opening Specifically disallowed by Ind 200 Nil
of the factory. AS-16, the reason being this
cost is not required to get the
assets ready for use.
11,000 9,500

So, the carrying amount of the factory building is Rs.9500.

X