IAS 16 PROPERTY, PLANT & EQUIPMENT (PPE) CA. Anuradha Jain Ex-Joint Director (Technical), ICAI

IAS 16

PROPERTY, PLANT & EQUIPMENT (PPE)

CA. Anuradha JainEx-Joint Director (Technical), ICAI

OBJECTIVE

To lay down accounting for PPE over its life

Initial recognition Subsequent measurement –

carrying amounts Depreciation & impairment Derecognition

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SCOPE

IAS 16 to be applied to PPE except when another standard requires or permits a different accounting treatment e.g.

a) PPE held for sale as per IFRS 5b) Biological assets related to agricultural

activity (IAS 41)c) Exploration & evaluation of mineral assets

(IFRS 6)d) Mineral rights & mineral reserves Standard applies to PPE used to develop

b) c) & d)

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SCOPE(CONTD.)

Other standards may require different approaches to recognition of PPE,e.g.,

IAS 17, Leases, recognition based on transfer of significant risks & rewards – Other aspects e.g. depreciation as per this standard

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Definition PPE

Tangible Items that Are held for use in the production or

supply of goods or services, for rental to others, or for administrative purposes; and

Are expected to be used during more than one priod

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RECOGNITION

Cost of PPE recognized as an asset if & only if

It is probable that future economic benefits associated with them will flow to the entity; and

Cost can be measured reliably

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RECOGNITION (CONTD.)

Spare Partsa) Usually carried as inventory & recognized in

profit or loss when consumedb) Major spare parts qualify as PPE when

expected to be used during more than one period

c) Can be used only in connection with an item of PPE, they are accounted for as PPE

Servicing Equipment - Same as a) and c) above

Stand by Equipment – same as b) above

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INITIAL COSTS

PPE acquired for safety or environmental reasons

Qualify for recognition or assets, because future economic benefits of related assets increase

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SUBSEQUENT COSTS

Same principles as those for initial recognition

Day-to-day servicing cost not recognized in the carrying amount (described as repairs & maintenance) – recognized in profit or loss

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PARTS OF PPE REQUIRING REGULAR REPLACEMENT

E.g.furnace requiring relining after specified period

Cost of replacing part of PPE is recognized in the carrying amount of PPE,if recognition criteria are met

Carrying amount of replaced part derecognized as per the derecognition provisions

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REGULAR MAJOR INSPECTIONS FOR FAULTS

E.g.Aircrafts Cost recognized as replacement if recognition

criteria met Remaining carrying amount of inspection

derecognized- Regardless of whether previous inspection

identified in the transaction when the item was acquired/constructed

- Estimated cost of future similar inspection as an indication of inspection component when item acquired/constructed

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MEASUREMENT AT RECOGNITION

At cost which comprises Purchase price including import duties &

non-refundable purchase taxes after deducting trade discounts & rebates

Costs directly attributable to bring the asset to the location & condition necessary for it to be capable of operating in the manner intended by the management

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MEASUREMENT AT RECOGNITION (CONTD.)

Initial estimate of costs of dismantling & removing the item & restoring the site on which located

(This requirement is not explicit in the existing Standard)

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MEASUREMENT AT RECOGNITION (CONTD.)Directly attributable costs Cost of employee benefits arising directly from

the costruction or acquisition of the item of PPE

Costs of site preparation Initial delivery and handling costs Installation and assembly costs Cost of testing whether the asset is functioning

properly (net of sale proceeds of samples produced)

Professional fees

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Recognition of costs in the carrying amount ceases when item is in the location & condition intended by management

Cost of using or deploying not included in the carrying amount

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Costs Not Includeda) Costs incurred when capable of

operating in the manner intended by management – has yet to be used or operated at less than full capacity

b) Initial operating losses,e.g.,when demand builds up

c) Costs of relocating or reorganizing part or all of an entity’s operations

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Costs Not Included Operations during construction not

incidental to bringing the asset to location & condition

e.g. use of land as car park where land acquired for constructing building – income/expense recognized in P&L

IAS 23 Borrowing Costs for recognition of interest of a self constructed item of PPE

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Self constructed assets Internal Profits to be eliminated Cost of abnormal amounts of

wasted material, labour and other resources incurred in self constructing an asset not to be included in cost of the asset

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MEASUREMENT OF COST Cash price equivalent Deferred payment terms beyond normal

credit period – interest expense/ capitalised Exchange TransactionsMeasured at FV unlessa) Exchange transaction lacks commercial

substance orb) FV of neither the asset acquired or given up

can be measured reliablyIn such cases cost measured at carrying amt of

asset given up

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MEASUREMENT OF COST (CONTD.)

If an entity is able to reliably determine FV of either the asset received or asset given up

FV of asset given up is used – unless the FV of the asset received is more clearly evident

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MEASUREMENT OF COST (CONTD.)

PPE held under finance lease by lessee

Cost as per IAS 17Govt.GrantsCost reduced by grant (IAS 20)(This treatment not available under IndAS 16)(Alternative treatment – set up the grant as

deferred income)

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MEASUREMENT AFTER RECOGNITION

Choose either cost model or revaluation model as accounting policy

Apply that policy to entire class Cost ModelCost less accumulated depreciation &

any accumulated impairment losses

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MEASUREMENT AFTER RECOGNITION (CONTD.)

Revaluation ModelPPE whose FV can be measured reliably,

measured at FV at revaluation date less subsequent accumulated depreciation & impairment losses

Revaluations at sufficient regularity – to ensure that carrying amount does not differ materially from that would be determined by arriving at FV at each reporting period

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FV of land & Buildings market based evidence – appraisal by

professionally qualified valuersPlant & EquipmentMV determined by appraisal No market based evidence of FV –

specialized PPE & item rarely sold except as part of continuing business

Estimate FV using an income or depreciated replacement cost approach

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Frequency of revaluations - depends upon – changes in FV of

PPE - PPE experiencing significant &

volatile changes in FV annual revaluation

- insignificant changes in FV – 3 to 5 yrs.

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Treatment of accumulated depreciation on revaluation

a) Restated proportionately with change in gross carrying amount so that carrying amount after revaluation equals revalued amount

Method used when revaluation by using index to determine depreciated replacement cost

b) Eliminated against gross carrying amount – net amount related to the revalued amount – often used for buildings

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Entire Classes to be revaluedClasses (examples) Land Land & Buildings Machinery Ships Aircrafts Motor Vehicles Furniture & fixtures Office equipment

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Entire Class to be revalued- Selective revaluation within a class

not permitted- Class of assets may be revalued on

rolling basis within a short period provided the revaluations are kept up to date

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Increase in asset’s carrying amount

- Recognized in other comprehensive income & accumulated under ‘revaluation surplus`

- Recognized in P or L to the extent it reverses previous revaluation decrease of the same asset

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Decrease on revaluation- Recognized in P or L- In other comprehensive income to the

extent of any credit balance in revaluation surplus

- Decrease recognized under other comprehensive income reduces the amount accumulated in equity under revaluation surplus

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Revaluation Surplus Transfer directly to retained earnings when asset

de-recognized Transferring the whole of surplus when asset is

retired or sold Some surplus is transferred as the asset is used Amt. of surplus transferred = Depreciation

based on revalued amt.- depreciation based on original cost

Not through P or L Effects of taxes on income because of revaluation

of PPE recognized & disclosed as per IAS 12

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DEPRECIATION

Component Approach

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

Allocation required – e.g.airframe & engines in an aircraft

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DEPRECIATION (CONTD.)Significant parts having the same useful lives

& dep.methods for the same item are grouped

- Remainder of parts not significant If varying expectations for those parts –

approximation techniques that faithfully represent consumption pattern

- Entity may choose to dep. even insignificant parts separately

- Dep.charge recognized in P or L unless included in carrying amt.of another asset

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DEPRECIATION (CONTD.)Depreciable Amt.& Depreciable PeriodDep. Amount (arrived at after deducting

residual value) shall be allocated on a systematic basis over useful life

Residual Value (RV) Estimated amt.that an entity would currently obtain from disposal of the asset after deducting costs of disposal

If the asset were already of the age & in the condition expected at the end of the useful life

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DEPRECIATION (CONTD.)

Useful life (UL) Period over which asset expected

to be available for use; or No.of production or similar units

expected to be obtained from the asset

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DEPRECIATION (CONTD.)Residual Life & Useful Life- review at the least at the end of

each financial year- Any changes accounted for as

change in accounting estimate

RV is equal or more than dep.amt. – dep.charge zero

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DEPRECIATION (CONTD.) Depr begins when asset available for use Depreciation on asset ceases at the earlier of - date it is classified as held for sale (IFRS 5) - the date the asset is de-recognized Depreciation does not cease when - asset becomes idle or - retired from active use - unless the asset is fully dep. However,under usage method (UoP) –

Dep.can be zero when there is no production

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Land & Buildings – separable assets and are accounted for separately even when acquired together

Land generally not depreciated unless it has limited life

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Depreciation Method- shall reflect the pattern in which the

asset’s future economic benefits are expected to be consumed

- Permitted Methods – SLM, WDV, UoP- Each component to be depreciated

separately if its cost is significant in relation to the total of that asset

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Depreciation Method- Review at least each financial year

end- Revise method if significant change

in the pattern of consumption of future economic benefits

- Change in accounting estimate as per IAS 8 – Prospective change

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ImpairmentApply IAS 36Compensation for ImpairmentFrom third parties include in Profit or

Loss when compensation becomes receivable

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DE-RECOGNITION

a) On disposal (sale,donation,given on finance lease, or

b) When no future economic benefits expected from use or disposal

- Gain or loss on de-recognition – include in profit or loss (Net disposal proceeds – carrying amount)

- Gains not classified as revenue

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DE-RECOGNITION (CONTD.)

Items of PPE routinely sold that are held for rental to others

- Transfer to inventories at their carrying amount when they cease to be rented & become held for sale

- Proceeds recognized as revenue- IFRS 5 does not apply to such assets

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DISCLOSURES

Para 73 to 79 of IAS 16

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Main differences with Indian GAAP

Cost of PPESimilar to IFRS in Indian GAAP

except - Under IFRS, if payment deferred beyond normal

credit limits, borrowing cost to be expensed/ capitalised as per IAS 23. No such explicit requirement under Indian GAAP.

- no general guidance in Indian GAAP for capitalization of dismantling & site restoration cost

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Main differences with Indian GAAP Subsequent cost- Subsequent routine maintenance exp is expensed off in

both the GAAPs- Under IFRS,replacement of parts ,cost of a major

inspection & overhaul occurring at regular intervals is capitalized when recognition criteria met-Indian GAAP permits capitalization only when exp increases future benefits from existing asset beyond its previously assessed standard of performance

- Under IFRS, carrying amount of replaced part needs to be decapitalised even if the replaced part had not been depreciated separately-no such requirement in Indian GAAP

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Main differences with Indian GAAP Revaluation

Under IFRS- Depreciation on revaluation can not be recouped

from revaluation reserve- allowed in Indian GAAP- Transfers from revaluation reserve to retained

earnings made directly & not through P& L A/c-permitted through P&L in Indian GAAP

- Revaluation to be kept sufficiently up to date to ensure that carrying amount does not differ materially from fair value-no such requirement in Indian GAAP for regular revaluations

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Main differences with Indian GAAP Component accounting

- Significant emphasis on separate accounting & depreciation of components of fixed assets under IFRS

- No such requirement in Indian GAAP

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Main differences with Indian GAAP Depreciation

• No minimum rates of depreciation under IFRS unlike Schedule XIV of Companies Act, 1956

• Change in method of depreciation-IFRS

Change in accounting estimate Applied prospectively

-Indian GAAP Change in accounting policy Applied retrospectively

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Main differences with Indian GAAP Depreciation

• IFRS requires annual review of-depreciation method

-useful life-residual value

Currently no such requirement in Indian GAAP

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THANK YOU !!

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Documents

IAS 16 PROPERTY, PLANT & EQUIPMENT (PPE) CA. Anuradha Jain Ex-Joint Director (Technical), ICAI