Highlights of Ind AS 16 - Property, Plant & Equipment

      Highlights of Ind AS 16 - Property, Plant & Equipment
Scope:
It applies to all tangible assets except for

  • Assets held for Sale and Assets of Discontinued Operations (Ind AS 2) 
  • Biological Assets other than bearer plant (Ind AS 41) 
  • Assets for Exploration and Evaluation of Mineral Resources (Ind AS 106) 
  • Mineral Right and Mineral, oil and natural gas reserves 
What is Plant, Property and Equipment (PPE):  

Plant, Property and Equipment (PPE) are assets which are held for use in production of goods, rendering of services, administrative use, and rental purpose and are expected to be used in more than one period It does not include assets held for sale. 

Recognition Principle:

Plant, Property and Equipment (PPE) shall be recognized if it is : 
  • Probable that future economic benefita will flow to entity, and
  • Cost can be measured reliably. 

Spare parts, Stand-by equipments and servicing equipments are recognized, only when they meet above definition of PPE. Otherwise, they are classified as inventory. 

Also, PPE acquired for safety or environmental reasons, although not directly increasing future economic benefits of any particular existing PPE, shall be recognized as asset as they enable entity to derive future economic benefits from related assets. 

Component Based Accounting: 

Components of assets having Substantial Value and different useful life should be recorded as separate asset and depreciated separately from the main asset of which it is part. Schedule II of Companies Act, 2013 also mandates Component Based Accounting.  

Initial Recognition: 

Plant, Property and Equipment (PPE) shall be measured at cost, which includes: 

Purchase Price + Import Duty + Non-Refundable Taxes + Costs directly attributable + Initial Cost of dismantling and removing the item, if entity has an obligation that it Incurs on acquisition of asset (-) Discounts and Rebates.

In case payment is deferred beyond normal terms of credit, the difference between cash price equivalent and total payment made is recognized as Interest over the period of credit and such interest may be capitalized in accordance with Ind AS 23.

The following points are required to be noted

Cost of repair & maintenance of PPE or day-to-day service shall be recognized in Statement of Profit & Loss.

However few parts of asset may require replacement at regular intervals. Also, items may be procured to make less frequently recurring replacement. Cost of such replacing part may be recognized as asset if recognition principle is met.

Carrying amount of part that is replaced shall be de-recognized in the books of accounts.

Exchange for Non-Monetary Assets: 

Assets acquired by way for exchange of non-monetary assets or combination of monetary and non-monetary assets, shall be recognized at Fair Value of asset acquired, unless: 

Exchange transaction lacks commercial substance ; or 
Fair value of neither asset acquired nor asset given up can be reliably measured 


Subsequent Measurement: 

Subsequent measurement of PPE can be done by: 
      By Cost Model; Or 
      By Revaluation Model 

The policy chosen shall apply to entire class of PPE. 

In case of Cost Model, PPE is carried at cost of asset acquired less accumulated depreciation and accumulated impairment losses. 

In case of Revaluation Model, PPE is carried at Fair Value at date of revaluation less any subsequent accumulated depreciation and accumulated impairment loss. If an item of PPE is revalued, the entire class of PPE to which asset belongs shall be revalued, to avoid reporting of amounts in financial statements that are mixture of costs and values at different dates.

Accounting Treatment of Revaluation: 

If an asset's carrying amount is increased as result of revaluation, it shall be recognized in Other Comprehensive Income and accumulated in equity under heading of Revaluation surplus. However, increase shall be recognized in Profit & Loss to the extent that it reverses a revaluation decrease of same asset previously recognized in P&L. 

In case, amount is decreased, it shall be recognized in Profit & Loss. However, decrease shall be recognized in Other Comprehensive Income to the extent of any credit balance existing in Revaluation Surplus in respect of that asset.

Depreciation: 

Depreciation is systematic allocation of depreciable asset over a useful life of asset. 

Each part of item of PPE with a cost that is Significant in relation to total cost of item shall be depreciated separately. 

Entity shall allocate the amount initially recognized in respect of item of PPE to its significant parts and depreciate each such part separately. 

Components of PPE having same useful life and depreciation method may be grouped in determination the depreciation charge.

Depreciation charge for each year shall be recognized in Profit & Loss, unless it is included in carrying amount of another asset. 

Sometimes, future economic benefits embodied in an asset are absorbed in producing other assets. In this case, depreciation charge constitutes part of cost of other asset and is included in its carrying amount.

Land and buildings are separable assets and are accounted for separately, even when they are purchased together except quarries and sites for landfill.

Depreciation Method:

Depreciation method used shall reflect the pattern in which asset's future economic benefits are expected to be consumed and it shall be reviewed at least at each financial year-end and in case it is required to be changed, it shall be treated as change in accounting policy and accounting estimate and shall take effect prospectively.

 Derecognition:

Carrying amount of an item of PPE shall be derecognized: 
  • On disposal, Or
  • When no future economic benefits are expected from its use. 

Gain or loss arising from de-recognition shall be included in Profit & Loss. 

 (Note: Few of the above points are taken from an author.)



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