Property, Plant &

NAS 16 Equipment
01 Recognition

02 Measurement at recognition

03 Measurement after Recognition

04 Derecognition
05 Disclosure
 CASE I
NAS 16 does not apply to: CASE II

Scope 1. Exploration and Evaluation

Apart from NAS 16 other
NAS also apply:

of Assets (NFRS 6)
2. Biological Assets(NAS 41) 1. Leased Assets( NAS 17)
3. PPE Classified as held for 2. Investment Property( NAS 40)
Sale(NFRS 5)

NAS 16 applied to all other

assets except Case I & II
Assets
As per Conceptual Framework, resources:
What does 1. Controlled by an Entity
Asset mean? 2. From which Future Economic benefit
are expected to flow to entity.

Recognition of Assets:
1. Future Economic benefit Flows
2. Cost or Value can be measured reliably.
 PPE is tangible item :

Property, Used in Production or Supply of goods and Services.

Plant, and
Equipment Rentals to others.
Incase of Leased Assets;
Recognition shall be as
per NAS 17 and
Depreciation as per
NAS 16

Administrative Purpose
1. It is probable that FEB flow to the entity.
2. Cost can be measure reliably.

1. Repair and Maintenance: Day to day repairs: Not PPE.

2. Replacement of part: If recognition criteria met, recognize as PPE.
Eg: Replacement of Aircraft Interior, interior walls of building.
3. Major Inspection Overhaul: If recognition criteria satisfied, recognize as PPE.
0
How about Road
Constructed on
Public Land by
and entity?

Entity does not have:

1. Legal Ownership
2. Right to Restrict Others

If entity proves that it is a part of their project

and no FEB flows without it, it can be
considered as assets.
These type of assets are called enabling assets.
Component Wise Recognition of PPE
Initial cost allocated on complex PPE segregated by significant cost are:
1. Separately identifiable and measureable
2. Useful Life shorter than complex assets.
3. Cost of component exceeds capitalization threshold.
4. Cost of component is significant.

Treatment of Spare Part and Stand By Equipment

Major Spare Part and stand by equipment which are To be recognized as PPE and Depreciated over
expected to be used for more than one accounting useful life.
period
Spare Part & Servicing Equipment which can be used only To be recognized as PPE & depreciated over the
in connection with particular item of PPE. (i.e. non- period not exceeding the remaining useful life of
interchangeable items) the related assets.
Other item of spare part and servicing equipment Expense on use. Unused items form part of PPE
 Separate
Acquisition

Subsequent
Finance Measurement
Lease

Self Initial
Constructed
Revaluation
Assets Measurement
Cost Model
Model
Exchange

Deferred
Cost
 Separate Acquisition

Purchase price including import duties Directly attributable cost Initial Estimate of Cost of Dismantling
and non-refundable purchase taxes.. and Removing the item and restoring.
 Cost of conducting business
Cost incurred in introducing
in a new location or with a
a new product or service.
new class of customer
(including cost of staff
training)
Cost
Excludes

Cost of opening a new Administrative and General

facility. Overhead
Self Constructed
Assets
Cost of Constructing an
Assets for Sale.

Abnormal Amount.

Eliminate Internal
profit.
Deferred Cost
Cash Price Equivalent is the cost of PPE..

Interest= Total Payment over

Deferred Period less Cash Price
Equivalent.

Interest Shall be recognized

each year.
Determination of Profit or Loss in Exchange of Assets.

Fair Value of the Assets Received

Add: Cash Received
Less: Carrying amount of Assets Given Up
Less: Cash Given up:
Profit/(Loss) on Exchange
 Subsequent Measurement

Cost Model Revaluation Model

Carrying Amount=Cost- Carrying Amount= FV at date of
Accumulated Depreciation- revaluation- Subsequent Accumulated
Accumulated Impairment Loss Depreciation – Subsequent
Accumulated Impairment Loss

Note: If revaluation model is followed, revaluation

shall be made for entire class of Assets.
 When to do Revaluation?

If value of assets experience significant and volatile changes

: Annual Revaluation

If insignificant changes in Fair Value

3 to 5 years
Eliminate Accumulated Depreciation Gross Carrying Amount is Adjusted in a
Against The Gross Carrying Amount of manner that is consistent with revaluation
Assets of carrying amount of assets.
T/F to Retained Earning when assets is
derecognized.
NAS 12 applicable in case of revaluation.
Difference between depreciation based on
revalued carrying amount of assets and
depreciation based on assets at original
cost T/F to retained earning from
revaluation surplus.
 Depreciation
Dependent on: Method of Depreciation
01 Cost of PPE
01 Straight Line Method
02 Useful Life

Scrap Value of PPE at the end of 02 WDV Method

03
useful life
03 Production Unit Method
04 Method of Depreciation

Reviewed each year

mandatorily(1-3)
 Depreciation
Depreciation Begins

Assets is available for use

Cases where No
depreciation will be
charged

b. If residual Value
Exceeds it’s carrying
amount
Cessation of Depreciation a. No production in
case Production
Method is Followed.
Earlier of
a. Assets Classified as Held for
Sale(NFRS 5)
b. The date that the assets is
derecognized.
 Factors Affecting Useful Life

Expected Usage of the T Technical or

assets Commercial Obsolence
E
R
Expected Physical Wear
A Legal or Similar limits
and Tear on the use of Assets
 Depreciation of Land
 Infographic Style

Useful Life of the Land is Unlimited, Hence, no depreciation shall be

charged.

Exceptions:
1. When the cost of site dismantilg and restoring cost is capitalized in cost of land.
2. Coal Mines
Derecognition
a.Disposal(Sales)
b.When no future economic benefits flows from assets.

Disposal can occur in shape of:

Sale
01

Any Event Requiring Derecognition

Lease For E.g: Theft or Loss
02 04

Donation 03
Following disclosures shall be made:
1. Measurement Base
2. Depreciation Method Used
3. Useful life of depreciation method used
4. Details of balance of following item at the beginning and end of the fiscal year:
1. Gross Amount of PPE
2. Accumulated Depreciation
3. Accumulated Impairment Losses
4. Net Amount of PPE
Reconciliation of the following at the beginning and end of financial period:
1. Addition of PPE
2. PPE classified as held for sale (NFRS 5)
3. Acquisition of PPE by Business Combination
4. Impairment of Assets
5. Reversal of Impairment Losses
6. Depreciation
7. Exchange differences ,if any
8. Any other changes.
•Current Estimate
•Future Estimate
•Initial Estimate
Initial Recognition

Debit : Part of PPE(NAS 16) Credit : Provision (NAS 37)

Subsequent Treatment

Depreciation Unwinding of Discount

 NAS 16: Property, Plant & Equipment
1. During the current year 2069/70, M/S Harish Power made the following expenditure relating to its Plant & Machinery:
Particulars Amount (Rs.)
General Repairs 400,000
Repairing of Electric Motors 100,000
Partial Replacement of Parts of Machinery 50,000
Substantial improvements to the electrical wiring
system which will increase efficiency of the plant &1,000,000
machinery
Explain with reference to relevant NAS; how the above expenses should be treated? (CAP Dec. 2013 Q5c-5 Marks; Inter Dec. 2006, Q 1c-4 Marks)
Answer
As per NAS 16 Property, Plant and Equipment, both initial & subsequent expenditure incurred on an item of PPE (add to, replace part of or servicing cost) are
recognized as included in the cost of an item of PPE if, and only if:
1.It is probable that economic benefit associated with the item will flow to the entity &
2.The cost of the item can be measured reliably.
Also, the standard states that cost of day-to-day servicing of an item of PPE are recognized in the profit or loss when incurred.
Based on these principles the treatment of expenditure incurred by Harish Power shall be as follows:
Particulars Capitalized Charged to P/L
General Repairs 400,000
Repairing of Electric Motors 100,000
Partial Replacement of Parts of Machinery * 50,000
Substantial improvements to the electrical1,000,000
wiring system which will increase efficiency of
the plant & machinery

* With respect to partial replacement of parts of the machinery, the company shall derecognize the carrying amount of replaced parts and include current
replacement cost.
 NAS 16: Property, Plant & Equipment
2. An electricity company decided to replace some parts of its plant by an improved plant. The plant to be replaced was built in 2043 for Rs.
4,200,000. It is estimated that it would cost Rs. 7,800,000 to build a new plant of the same size and capacity. The cost of the new plant as per
the improved design was Rs. 12,600,000 and in addition, material belonging to the old plant valued at Rs. 456,000 was used in the
construction of the new plant. The balance of the plant was sold for Rs. 360,000.
Compute the amount to be written off to and the amount to be capitalized. Also prepare Plant Account and Replacement Account. (CAP
Dec. 2014 3a-7 Marks; CAP Jun. 2015 Q3a- 7 Marks)
Answer The question is missing information with regards to accumulated depreciation till date. For solving, it has been assumed that the
accumulated depreciation on the old plant till date is Rs. 30,00,000. Since we are given the cost of the plant to be replaced, the
information provided with regards to the cost breakdown and increment is of no significance in solving the question.

Old Plant A/c New Plant A/c

Particulars Amount Particulars Amount Particulars Amount Particulars Amount
To Balance b/d 4,200,000 By Accumulated depreciation 30,00,000
To Material/Labor/OH 12,600,000 By Balance c/d 13,056,000
By New Plant A/C 4,56,000
By Bank A/C 3,60,000
By Loss on replacement 384,000 To Old Plant A/c 456,000
(charged to P/L for the period) 13,056,000 13,056,000
44,00,000 44,00,000
 NAS 16: Property, Plant & Equipment
3. The Written Down Value of Property, Plant & Equipment of Prudence International Pvt. Ltd. as on Ashadh end, 2072 was Rs. 2,000,000.
The company decided to revalue its Property, Plant & Equipment on Ashadh end, 2072. This is the first instance when the company has
gone for any revaluation of assets.
With reference to NAS; explain the financial impact on account of revaluation of Property, Plant & Equipment on (i) Reserves & Surplus
and (ii) Profit & Loss if:
i.Property,Plant&EquipmentisrevaluedatRs. 2,500,000.
ii.Property,Plant&EquipmentisrevaluedatRs. 1,600,000.(CAP Dec. 2015 Q-5B)
Answer: As per NAS 16 Property, Plant & Equipment:
 On upward Revaluation:
If an asset's carrying amount is increased as a result of a revaluation:
• the increase shall be credited directly to equity under the heading of Revaluation Surplus.
• However, the increase shall be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset
previously recognized in profit or loss.
Hence, in case of revaluation of property, plant & equipment to Rs. 2,500,000; Rs. 500,000 shall be credited directly to equity under
Revaluation Surplus.

 On downward Revaluation:
If an asset's carrying amount is decreased as a result of a revaluation:
• the decrease shall be recognized in profit or loss.
• However, the decrease shall be debited directly to equity under heading of revaluation surplus to the extent of any credit balance
existing in the revaluation surplus in respect of that asset.
 Hence, in case of revaluation of property, plant & equipment to Rs. 1,600,000; Rs. 400,000 shall be recognized as expense in Profit
or Loss for the period.
 NAS 16: Property, Plant & Equipment
4. Tinkune Ltd.’s head office building is the only building it owns. Using professional valuers, it revalued the building on 1st Shrawan 2074,
at Rs. 21,00,000. Tinkune Ltd. has adopted a revaluation policy for buildings from this valuation date and has decided that the original useful
life of buildings has not changed as a result of the revaluation. The building was acquired on 1st Shrawan 2064. The cost of the building on
acquisition was Rs. 25,00,000 and the accumulated depreciation to the Ashadh end, 2074 amounted to Rs. 5,00,000. The depreciation up
to 1st Shrawan 2074 was depreciated evenly since acquisition. The professional valuer believes that the residual value on the building
would be Rs. 6,00,000 at the end of its useful life.
Required: Calculate the depreciation amount of the building for the year ended 32nd Ashadh 2075 based on the information provided
in the above scenario. (CAP Dec. 2018 Q5a-5 Marks)
 Answer
The depreciation amount is as follow:
To calculate the new depreciation amount, we use the following depreciation formula.
Revalued cost of asset-residual value 21,00,000-6,00,000
Expected useful life of asset 40 yrs
Depreciation per year Rs. 37,500
Working Note 1
Building-original cost 25,00,000
Building- Accumulated Depreciation 5,00,000
Accumulated Depreciation/Cost= 20%
Building has been depreciated by 20 % over 10 years, so annual rate of depreciation has been 2 % i.e. 20%/10 years, as asset has been
depreciated evenly since acquisition. Therefore, the original useful life is 50 years and the remaining useful life is 40 years.
 NAS 16: Property, Plant & Equipment
5. In Fiscal Year 2061/062, M/S PD Ltd. re-valued its Plant and Machinery upward by Rs. 57,000 by crediting as income in
Income Statement. In the fiscal year 2063/64, the assets under Plant and Machinery are re-valued downwards by Rs. 25,000 by
changing as expense to income statement. Give your view on the accuracy of above accounting treatments with reference to
NAS-16. (Inter June. 2008 Q4b)
 Answer
 According to NAS – 16 'Property, Plant and Equipment and Depreciation" – when an asset's carrying amount is increased as
a result of a revaluation, the increase should be recognized in other comprehensive income and accumulated in equity under
the heading of revaluation surplus. However, the increase shall be recognized in profit or loss to the extent that it reverses a
revaluation decrease of the same asset previously recognized in profit or loss.
 When an asset's carrying amount is decreased as a result of revaluation, the decrease should be recognized as an expense.
However, the decrease shall be recognized in other comprehensive income to the extent of any credit balance existing in the
revaluation surplus in respect of that asset. The decrease recognized in other comprehensive income reduces the amount
accumulated in equity under the heading of revaluation surplus.
 In the given case the plant and machinery were revalued upward by Rs. 57,000 in fiscal year 2061/62 and the surplus on
revaluation is credited to income statement. The credit of revaluation surplus to income statement is against NAS-16, which
should be credited to revaluation surplus. Similarly, the downward revaluation of plant and machinery in fiscal year 2063/64
should be deducted from 'revaluation surplus', created in fiscal year 2061/62.
 Impact on depreciation has been ignored due to lack of information CAP II Paper
 NAS 16: Property, Plant & Equipment
6. M/s. Laghu Udyog Limited has been charging depreciation on an item of plant and machinery on straight line basis. The
machine was purchased on 1-4-2070 at Rs. 3,25,000. It is expected to have a total useful life of 5 years from the date of
purchase and residual value of Rs. 25,000. Calculate the book value of the machine as on 1-4-2072 and the total depreciation
charged till 31-3-2072 under SLM. The company wants to change the method of depreciation and charge depreciation @ 20%
on WDV from 2072-73. Is it valid to change the method of depreciation? Explain the treatment required to be done in the books
of accounts in the context of Accounting Standards.
Ascertain the amount of depreciation to be charged for 2072-73 and the net book value of the machine as on 31-3-2073 after
giving effect of the above change. (CAP Jun. 2017 Q5b-5 Marks)
Answer As per NAS 16 ‘ Property, Plant & Equipment’, the depreciation method applied to an asset shall be reviewed at least at
each financial year end and, if there has been a significant change in the expected pattern of consumption of the future economic
benefits embodied in the asset, the method shall be changed to reflect the changed pattern. Such a change shall be accounted for
as a change in an accounting estimate in accordance with NAS 08.
As per NAS 08 ‘Accounting Policies, Changes in Accounting Estimates & Errors’, changes in accounting estimates shall be
adjusted prospectively that means the effect of a change in an accounting estimate shall be included in the determination of net
profit or loss in:
(a) The period of the change, if the change affects the period only; or
(b) The period of the change and future periods, if the change affects both.
In the given case, the company can change the method of depreciation from year 2072-73 if the conditions set aside in above
paragraph have been fulfilled.
 NAS 16: Property, Plant & Equipment
Q. 6 contd…
 NAS 16: Property, Plant & Equipment
7. The depreciation of machinery under two different methods is as given below:
Year SLM (lacs) WDV (lacs)