## IND AS 16: Property, Plant and Equipment - A Comprehensive Guide for CA Final Students **Introduction** Welcome to the world of IND AS 16, a crucial standard for any CA Final student aspiring to master financial reporting. This chapter provides a comprehensive and exam-oriented guide to understanding the intricacies of accounting for property, plant and equipment (PPE) under IND AS 16, aligning with the terminology and approach favoured by the ICAI. **1. Objective and Scope of IND AS 16** IND AS 16 aims to ensure transparent and consistent reporting of an entity's investment in PPE. This transparency enables users of financial statements to understand: - The value of an entity's investment in PPE. [1] - How this investment changes over time. [1] This standard applies to all PPE except when another standard specifies a different treatment. [2] For instance: - PPE classified as held for sale is addressed under IND AS 105. [2] - Biological assets related to agriculture (except bearer plants) are covered under IND AS 41. [2] - Exploration and evaluation assets fall under IND AS 106. [2] - Mineral rights and reserves like oil and natural gas are not covered. [2] However, this standard **does apply** to PPE used in developing or maintaining the assets mentioned above. [2] It is important to note that entities applying IND AS 40 for investment property must use the cost model of IND AS 16 for owned investment property. [2] **2. Key Definitions - Understanding the Language of IND AS 16** Before delving into the application of the standard, it's essential to grasp the key terms it uses. These definitions are crucial for accurate interpretation and application of the standard in practical scenarios. Let's break down some of the most important ones: - **Property, Plant and Equipment (PPE):** Tangible assets held for use in production or supply of goods or services, for rental to others, or for administrative purposes, with an expected usage period of more than one accounting period. [3] - **Bearer Plant:** A living plant used in agricultural production that bears produce for more than one period and is unlikely to be sold as agricultural produce (except for incidental scrap sales). [3] - **Carrying Amount:** The value at which an asset is recognised in the balance sheet after deducting accumulated depreciation and impairment losses. [3] - **Cost:** The cash or cash equivalent paid, or the fair value of consideration given, to acquire an asset. It also includes the amount attributed to the asset upon initial recognition as per other IND AS, like IND AS 102. [4] - **Depreciable Amount:** The cost of an asset (or its substitute) less its residual value. [4] - **Depreciation:** The systematic allocation of the depreciable amount of an asset over its useful life. [5] - **Fair Value:** The price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Refer to IND AS 113 for a detailed explanation. [5] - **Impairment Loss:** The amount by which the carrying amount of an asset exceeds its recoverable amount. [6] - **Recoverable Amount:** The higher of an asset's fair value less costs of disposal and its value in use. [6] - **Residual Value:** The estimated amount an entity would obtain from disposing of the asset at the end of its useful life, after deducting estimated disposal costs. [6] - **Useful Life:** The period over which an asset is expected to be available for use by an entity, or the number of production or similar units expected to be obtained from the asset. [7] **3. Recognition of PPE - When Does an Asset Qualify?** An item of PPE can be recognised as an asset only when **both** of the following criteria are met: - **Future Economic Benefits:** It's probable that future economic benefits associated with the item will flow to the entity. [7] - **Reliable Measurement:** The cost of the item can be measured reliably. [7] **3.1 Spare Parts, Stand-by Equipment and Servicing Equipment** These items are recognised as PPE only if they meet the definition. If not, they are classified as inventory. [8] **3.2 Unit of Measurement and Aggregation** IND AS 16 doesn't prescribe a specific unit for recognition. Judgement is required to apply the recognition criteria to individual circumstances. [8] It's acceptable to aggregate individually insignificant items (like moulds or tools) and apply the criteria to the aggregate value. [8] **3.3 Initial Costs** The initial cost of PPE includes: - **Purchase Price:** Including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. [9] - **Directly Attributable Costs:** Costs necessary to bring the asset to the location and condition needed for its intended operation. Examples include: [10] - Employee benefits directly related to construction or acquisition. [11] - Site preparation costs. [11] - Initial delivery and handling costs. [11] - Installation and assembly costs. [11] - Professional fees. [11] - Testing costs (after deducting net proceeds from items produced during testing). [11] - **Dismantling, Removal, and Site Restoration Costs:** These are estimated costs incurred upon acquisition or as a consequence of using the asset. [10] It's crucial to differentiate between costs that **can** and **cannot** be capitalised. For example, costs like staff training for a new location, introducing a new product, or general overhead costs are **not** considered directly attributable and cannot be capitalised. [12, 13] **3.4 Subsequent Costs - Maintaining and Enhancing your PPE** Not all costs incurred after an asset is put to use are added to its carrying amount. Let's examine the different scenarios: - **Repairs and Maintenance:** Day-to-day servicing costs are expensed as incurred. These include labour, consumables, and small parts. [14] - **Replacement of Parts:** When parts are replaced at regular intervals (e.g., furnace relining) or on a less frequent or non-recurring basis, the cost is added to the asset's carrying amount if the recognition criteria are met. The replaced part's carrying amount is derecognised. [14, 15] - **Major Inspections or Overhauls:** Costs of major inspections, even without part replacement, are capitalised if they restore the asset to operating condition. The carrying amount of the previous inspection is derecognised. [16] **4. Measurement at Recognition - Determining the Initial Value** **4.1 Measurement at Cost** Generally, PPE is initially measured at cost. [9] **4.2 Elements of Cost** - **Cost of an Acquired Asset:** See section 3.3 for a detailed breakdown. [9] - **Cost of a Self-Constructed Asset and Bearer Plants:** This is determined using the same principles as for an acquired asset. Internal profits are eliminated, and abnormal waste costs are excluded. [12] IND AS 23 provides guidance on capitalising borrowing costs. [17] Bearer plants are treated like self-constructed assets until they are ready for their intended use. [17] - **Cost of Dismantling, Removal and Site Restoration:** Measured in accordance with IND AS 37. If these costs are incurred during acquisition or while the asset is used for purposes other than producing inventories, they're included in the PPE cost. [13, 18] - **Incidental Operations:** Income and expenses from operations not necessary for bringing the asset to its intended use are recognised in profit or loss. [19, 20] - **Cessation of Capitalisation:** Cost recognition ceases when the asset is ready for its intended use. Costs incurred during use or redeployment are not included in the carrying amount. [20, 21] **4.3 Payment Deferred Beyond Normal Credit Terms** The cost is the cash price equivalent at the recognition date. Any difference between this and the total payment is recognised as interest over the credit period unless capitalised under IND AS 23. [22] **4.4 Measurement of PPE Acquired in Exchange** When PPE is acquired in exchange for non-monetary assets or a combination of monetary and non-monetary assets, the cost is measured at fair value unless: [23] - The exchange lacks commercial substance. [23] - The fair value of either the asset received or given up cannot be reliably measured. [23] If fair value measurement isn't possible, the cost is measured at the carrying amount of the asset given up. [24] **5. Measurement After Recognition - Choosing the Right Model** An entity must choose either the cost model or the revaluation model for an entire class of PPE. [25] **5.1 Cost Model** Under the cost model, PPE is carried at its cost less accumulated depreciation and impairment losses. [25] **5.2 Revaluation Model** If an asset's fair value can be measured reliably, the revaluation model carries it at fair value at the revaluation date, less subsequent accumulated depreciation and impairment losses. [26] Revaluations must be frequent enough to ensure the carrying amount doesn't materially differ from fair value at the reporting date. [26] **5.3 Key Considerations for Revaluation** - **Frequency:** Depends on the volatility of the asset's fair value. Assets with significant fluctuations may need annual revaluation, while others can be revalued every 3-5 years. [27] - **Accumulated Depreciation:** At revaluation, the asset's carrying amount is adjusted to the revalued amount. The accumulated depreciation can either be adjusted to the difference between the gross carrying amount and the revalued carrying amount or eliminated against the gross carrying amount. [28] - **Entire Class:** Revaluation should be applied to the entire class of assets to avoid selective revaluation and mixed carrying amounts. [29] However, a rolling basis within a short period is allowed, provided revaluations are kept up to date. [30] - **Treatment of Surplus or Deficit:Increase in carrying amount:** Recognised in other comprehensive income (OCI) and accumulated in equity as revaluation surplus, unless it reverses a previous revaluation decrease recognised in profit or loss. [31] - **Decrease in carrying amount:** Recognised in profit or loss, unless it offsets a credit balance in the revaluation surplus. The decrease recognised in OCI reduces the accumulated revaluation surplus. [32] - **Transfer to Retained Earnings:** The revaluation surplus can be transferred directly to retained earnings upon derecognition or gradually as the asset is used. Transfers are not made through profit or loss. [33] - **Tax Effects:** Governed by IND AS 12. [34] **6. Depreciation - Allocating the Cost of Use** The depreciable amount should be allocated systematically over the asset's useful life. Depreciation is recognised in profit or loss unless included in another asset's carrying amount. [35] **6.1 Key Considerations for Depreciation** - **Significant Parts:** Parts with significant cost relative to the total cost should be depreciated separately. [36] - **Grouping:** Parts with similar useful lives and depreciation methods can be grouped. [36] - **Remainder:** The remaining parts not individually significant are also depreciated separately. Approximation techniques may be needed if varying expectations exist. [37] - **Land and Buildings:** Accounted for separately. Land usually has an unlimited useful life and isn't depreciated (except for instances like quarries or landfill sites). Buildings have a limited useful life and are depreciated. [37] - **Residual Value:** Reviewed at least annually. Changes are accounted for as changes in accounting estimates per IND AS 8. [38] - **Commencement:** Depreciation begins when the asset is available for use. [39] - **Cessation:** Depreciation ceases when the asset is classified as held for sale (IND AS 105) or derecognised, whichever is earlier. Depreciation continues even if the asset is idle unless fully depreciated. [39] - **Factors Affecting Useful Life:** [40, 41] - Expected usage (capacity or output). - Expected physical wear and tear (operational factors, maintenance, care while idle). - Technical or commercial obsolescence (changes in production, market demand). - Legal or similar limits on use (lease expiry). - **Asset Management Policy:** An entity's disposal policy may result in a useful life shorter than the asset's economic life. [42] - **Depreciation Method:** Should reflect the consumption pattern of future economic benefits. The chosen method should be reviewed at least annually and changed if the consumption pattern changes significantly. Changes are accounted for as per IND AS 8. [43] - **Common Depreciation Methods:** [44] - Straight-line: Constant charge over the useful life. - Diminishing balance: Decreasing charge over the useful life. - Units of production: Charge based on expected use or output. **7. Impairment - Addressing Loss in Value** IND AS 36 governs impairment of PPE. This standard outlines: - Reviewing the carrying amount of assets. [45] - Determining the recoverable amount of an asset. [45] - Recognition and reversal of impairment losses. [45] **7.1 Compensation for Impairment** Compensation from third parties for impaired, lost, or given up PPE is recognised in profit or loss when receivable. [46] **8. Derecognition - Removing an Asset from the Books** An asset's carrying amount is derecognised: - Upon disposal. [47] - When no future economic benefits are expected from its use or disposal. [47] **8.1 Key Considerations for Derecognition** - Gain or loss on derecognition is recognised in profit or loss (unless IND AS 116 applies for sale and leaseback). [47] - Entities routinely selling previously rented PPE transfer them to inventories at carrying amount when they become held for sale. Proceeds are recognised as revenue under IND AS 115. [48] - Disposal date is when the recipient obtains control as per IND AS 115. [48] - When replacing a part, the replaced part's carrying amount is derecognised. If the carrying amount isn't readily determinable, the replacement cost can be used as an indication of its original cost. [49] - Gain or loss is the difference between net disposal proceeds and carrying amount. [50] - Disposal date is when the recipient obtains control as per IND AS 115. IND AS 116 governs sale and leaseback disposals. [50] - The consideration amount is determined per IND AS 115's transaction price requirements. [51] - Subsequent changes to the estimated consideration are accounted for per IND AS 115. [51] **9. Disclosure - Providing Transparency in Financial Statements** For each class of PPE, disclose: - Measurement bases for gross carrying amount. [52] - Depreciation methods used. [52] - Useful lives or depreciation rates. [52] - Gross carrying amount and accumulated depreciation (aggregated with impairment losses) at the beginning and end of the period. [52] Additionally, provide a reconciliation of the carrying amount, showing: [53] - Additions. - Assets held for sale and other disposals. - Acquisitions through business combinations. - Revaluation and impairment impacts on OCI. - Impairment losses and reversals in profit or loss. - Depreciation. - Net exchange differences from translation. - Other changes. Also disclose: [54] - Restrictions on title and pledged PPE. - Expenditures capitalised during construction. - Contractual commitments for PPE acquisition. - Compensation for impaired, lost, or given up PPE (if not disclosed separately in the statement of profit and loss). - Depreciation recognized in profit or loss or as part of other asset costs. [55] - Accumulated depreciation at the period end. [55] - Nature and effect of changes in accounting estimates (residual values, dismantling costs, useful lives, depreciation methods). [55, 56] **9.1 Additional Disclosures for Revalued Amounts** For revalued PPE, also disclose: - Effective date of revaluation. [56] - Involvement of an independent valuer. [56] - Carrying amount under the cost model for each revalued class. [57] - Revaluation surplus, including changes and restrictions on distribution to shareholders. [57] **9.2 Encouraged Disclosures** While not mandatory, consider disclosing: - Carrying amount of temporarily idle PPE. [58] - Gross carrying amount of fully depreciated PPE still in use. [58] - Carrying amount of retired PPE not classified as held for sale. [58] - Fair value of PPE under the cost model if materially different from the carrying amount. [58] **10. Changes in Existing Decommissioning, Restoration and Similar Liabilities** Appendix A of IND AS 16 provides guidance on accounting for changes in the measurement of these liabilities, which are initially recognised as part of the cost of PPE (under IND AS 16) or a right-of-use asset (under IND AS 116). [59, 60] **10.1 Accounting Treatment** The approach differs based on the measurement model used: **Cost Model:** [61] - Changes in the liability are generally added to or deducted from the asset's cost. [61] - A decrease cannot exceed the carrying amount of the asset. Any excess decrease is recognised immediately in profit or loss. [62] - An increase might indicate impairment and requires testing the asset's recoverability. [62] **Revaluation Model:** [63, 64] - An increase is adjusted against the revaluation surplus (through OCI). Any excess is recognised in profit or loss. [63] - A decrease is recognised in the revaluation surplus (through OCI). If a previous revaluation deficit exists, it can be reversed in profit or loss. [63] - A decrease exceeding the carrying amount is treated as a deemed revaluation and recognised in profit or loss. [64] - Changes require impairment testing to assess fair value changes. [65] - Revaluation surplus changes are presented separately in the Statement of Other Comprehensive Income. [65] **General Points:** [65, 66] - Once the asset's useful life ends, subsequent liability changes are recognised in profit or loss. [65] - The periodic unwinding of the discount is recognised in profit or loss as a finance cost. Capitalisation is not allowed. [66] **11. IND AS 16 vs. AS 10 and IAS 16 - Understanding the Differences** - **IND AS 16 vs. AS 10:** Key differences include: [67] - Treatment of retired fixed assets held for sale (covered under IND AS 105, not AS 10). - Guidance on stripping costs in surface mine production (present in IND AS 16, absent in AS 10). - **Carve Out in IND AS 16 vs. IAS 16:** A carve-out exists due to the treatment of proceeds from items produced during testing. IND AS 16 allows deducting these proceeds from the asset's cost, while IAS 16 prohibits this. This difference affects depreciation, impairment, and deferred tax calculations. [68, 69] **Conclusion** This chapter equips you with the knowledge and understanding of IND AS 16 necessary for your CA Final examinations. Remember to practice applying the concepts discussed through illustrations and past exam questions. By mastering IND AS 16, you take a significant step towards becoming a proficient financial reporting professional! 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