Professional Documents
Culture Documents
Study Material
Semester- VI
Year- 2020
❖ 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:
❖ 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.
(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 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.
➢ Replacement – Capitalized
❖ 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
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.
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.
Depreciation
Residual Value < Carrying Amount Residual Value > Carrying Amount Asset is hold for sale
Depreciation Method
❖ Derecognition: The carrying amount of an item of PPE shall be derecognised in two situations:
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.
(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.
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.
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.