Ind AS 16

Property, Plant And Equipment

Ind AS Workshop(Organised by YMEC of ICAI)

Hotel Kempinski, Vishwas Nagar

July 26, 2015

• AS 10: Accounting for Fixed Assets

• AS 6 : Depreciation Accounting

• Schedule II of the Companies Act, 2013IGAAP

• Ind AS 16 : Property, Plant and Equipment

• Appendix A : Change in existing decommissioning, Restoration and Similar Liabilities

• Appendix B : Stripping cost in the production phase of a surface mine

Ind AS

• IAS 16 : Property, Plant and Equipment

• IFRIC 1: Change in existing decommissioning, Restoration and Similar Liabilities

• IFRIC 20 : Stripping cost in the production phase of a surface mine

IFRS

Applicable Guidance

Session Take Away• Scope and Definition of PPE

• Recognition and Measurement

• Componentisation

• Inspection and Overhauls

• Deferred Payment Terms

• Decommissioning and Site restoration cost

• Revaluation – Fair Value• Determination of carrying

amount• Depreciation charges• Impairment losses• Ind AS Vs IGAAP• Carve Outs

• Prescribe the accounting treatment for PPE

• Recognition of the assets

• Determination of carrying amount

• Depreciation charges

• Impairment losses

Objectives of Ind AS 16

Basic Asset Life Cycle

Property, Plant Equipment

This Standard will be applicable to property, plant and equipment which are used to develop or maintain the above assets.

Ind AS

105

• PPE classified as held for sale

Ind AS 41

• biological assets related to agricultural activity

Ind AS 106

• the recognition and measurement of exploration and evaluation assets

• mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources

Ind AS 16 applicable to all kinds of PPE except

PPE

Tangibleitems

Held for use in production or

supply of goods or services Expected to

used during more than one

period

Definition of PPE

AS 10 (IGAAP)Fixed asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business.

Recognition criteria

Probable that future economic

benefits will flow to entity

Cost can be measured

reliably

Recognition of cost as an asset

(PPE)

AS 10 (IGAAP)- No Such specific recognition criteria.- Item which meet the definition of fixed asset will be recognised as a fixed asset

Spare parts or Servicing equipment

Normally treated as inventory and expensed off as consumed

Major spare parts and stand-by equipment expected to be used during more than one period are treated as PPE. (if they meet the definition of PPE as per Ind AS 16)

Depreciated over the useful life of the main assets to which it relates.

AS 10 (IGAAP) - Spare parts are capitalised, if they can be used only in connection with a fixed asset and whose use is expected to be irregular.

Component Accounting

Separation of an asset into its significant components

- Significant Cost of a part in proportion to total cost

- May have different useful life.

IGAAP

Para 8.3 of AS 10 only touch upon on this issue and states that Accounting for FA may be improved if total cost thereof is allocated to its various parts.

Component Accounting

The Companies Act, 2013

Mandatory as per Schedule II of the CA 2013 from April 1, 2015. (Voluntary for 2014-15)

Bridges the gap under converged IFRS and Existing Scenario for this requirement.

Imapct of moving to new regime of

Ind AS ??

13 f 16 (revised): Plant Property & Equipment

SHIP: MV SANTA CLAUS Allocated cost

Residual

value

Useful

life Depreciation

Keel 120,000,000 6,000,000 25 4,560,000

Bridge 70,000,000 10,500,000 25 2,380,000

Anchor windlass with chains 20,000,000 2,000,000 25 720,000

Bulkhead 90,000,000 9,900,000 20 4,005,000

Propulsion system 30,000,000 3,000,000 20 1,350,000

Decks 100,000,000 5,000,000 15 6,333,333

Boiler 10,000,000 1,000,000 15 600,000

Hydraulic crane 30,000,000 7,500,000 15 1,500,000

Turbine generator 20,000,000 1,000,000 15 1,266,667

Bow thruster 20,000,000 2,000,000 12 1,500,000

Refrigeration system 20,000,000 4,000,000 11 1,454,545

Fresh water generator 10,000,000 1,000,000 11 818,182

Life raft 10,000,000 1,000,000 10 900,000

Others 50,000,000 5,000,000 10 4,500,000

600,000,000 58,900,000 31,887,727

Subsequent Costs

• Same criteria followed as of initial recognition.

• Probable that future economic benefits will flowand cost can be measured reliably.

• Day to day servicing cost which includes labourand consumables needs to be expensed off

• It can be in the form of followings:

- Replacement Cost

- Inspection Cost etc.AS 10 (IGAAP) – Subsequent expenditures relating to an item of Fixed Assets should be added to its Book value only if they increase the future benefits from the existing asset beyond its previously assessed standard of performance.

Subsequent costs - Major inspections or overhauls

Overhaul costs may involve three elements; Inspection, Replacement of parts and Major Maintenance.

Cost of major inspection is recognised as PPE if it meets the asset recognition criteria.

Any remaining carrying amount relating to the previous inspection is derecognized irrespective of whether previous inspection was separately identified and depreciated.

Uddan Ltd buys an aircraft for 90 Lakhs. Under civil aviation rules, theaircraft requires a major inspection every three years at a cost of 5 lakh.Three year after purchase it undergoes its first major inspection. The cost inrelation to this inspection amounting to 7 Lakhs.

Explain how the same should be accounted for in accordance withthe requirements of Ind AS 16?

Case Study

The original carrying value would have been allocated as follows:-

Aircraft + Cost of Inspection = 85 Lakhs + 5 Lakhs = 90 Lakhs

Para 14 of Ind AS 16 provides that in such case Original cost of inspection isderecognised and the new inspection cost will be recognised in the carryingamount. So, New inspection cost will be accounted for as an asset additionand the original cost as an asset disposal.

Gross Block

Aircraft = 85 Lakhs

Inspection Component = Original Cost of Inspection (-)derecognitionof original inspection+ New inspection Cost

= +5 Lakhs - 5 Lakhs + 7 Lakhs = 7 Lakhs

Solution

Measurement at initial recognition

At cost only

Purchase price –including Import duties and non refundable taxes

Directly attributable costs for bringing the

asset

Costs of dismantling and removing the item

and restoring

Examples of directly attributable costs

Costs of testing whether the asset is working properly after deducting proceeds from sale of any product produced during

the testing period

Installation and assembly costs

Initial delivery and handling costs

Cost of employee benefits

Costs of site preparation

Professional fees

Examples of not directly attributable costs

Costs of opening a new

facility

Administration and other

general overhead

costs

Costs incurred in introducing a new product

or service

Costs of conducting

business in a new location or with a new

class of customer (including

costs of staff training)

Deferred Payment credit(Paragraph 23 and 72 of Ind AS 16)

• Cost of an item of PPE is the cash price equivalent at the recognition date.

• In case payment is deferred beyond normal credit terms: Difference between the cash price equivalent and total payment is recognised as interest over the period of credit unless such interest is capitalised.

IGAAPExisting AS 10 does not contain this requirement.

Decommissioning cost

Cost towards dismantling and

removing the asset and

restoring the original site after

use

Corresponding obligation

recognised as a provision under

Ind AS 37

Typically arise in oil and gas, mining and electricity industries

For example : building an

additional internal wall with condition

that property will be returned in original state at the end of

lease

IGAAPExisting AS 10 does not contain this requirement.

Measurement subsequent to Initial recognition

• Can choose either Cost model or Revaluation modelas its accounting policy

• Accounting policy should be applied to the whole of a class of property, plant and equipment and not merely to individual assets within a class.

Cost model

Cost Accumulated depreciation

accumulated impairment

losses

Carrying Amount

Revaluation Model

Revalued Amount on the date of revaluation

Subsequentaccumulated depreciation

Subsequentaccumulated impairment

losses

Carrying Amount

If a single item of PPE is revalued, then the entire class of PPE to which that item belongs should be revalued.

Class of assets : a grouping of assets of a similar nature and use in an entity’s operations

After initial recognition, PPE to carried at revalued amount, being its fair valueat the revaluation date.

Frequency of

revaluations

Valuations need not to be performed every year or every reporting period

At sufficient regularity such that the carrying amount does not differ materially from the fair value

Where movement in fair values are volatile and significant-frequent revaluation

Otherwise- every 3-5 years

Imapct of moving to new regime of

Ind AS ??

IGAAP (AS 10)- Systematic basis selection- No guidance on FV & frequency of revaluation

First Time

Increase

Debit the Asset

Credit the Revaluation reserve

Subsequent

Increase in value

Credit to Reserve and Surplus

Decrease in value

Debit to reserve and Surplus to the extent balance available and

remaining to P&L

Decrease

Debit P&L account

Credit the asset

Subsequent

Increase in value

Charged to P&L to the extent of earlier debit

to P&L, Balance to Revaluation Reserve

Decrease in value

Charged to P&L account

Revaluation gains and losses

Depreciation

The depreciable amount of an asset

should be allocated on a systematic basis

over its useful life.

Depreciation charges should be recognised as an expense unless they are included in the carrying amount of another asset.

• Depreciation of an asset begins when it is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management

• Depreciation is charged till point, residual value is greater than and equal to carrying amount.

• Depreciation ceases when an asset is derecognized or held for sale under Ind AS 105.

• Depreciation does not stop automatically when an asset is idle.

Depreciation

Method of depreciation

The depreciation method adopted should reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.

If there is significant change in expected pattern of consumption ,method of depreciation to be changed in lines with the future benefits.

Method changes are accounted for as a change in an accounting estimate. (Ind AS 8)

The method should result in a depreciation charge throughout the asset's useful life and not just towards the end of its useful life or when the asset is falling in value.

Change in estimate of useful life and residual value

Useful life and residual value are to be reviewed at every year end.

If there is any change in Useful life/ RV, the same is treated as changes in estimates and accounting will be done prospectively.

Future annual depreciation will be revised basis the new useful life.

The method should result in a depreciation charge throughout the asset's useful life and not just towards the end of its useful life or when the asset is falling in value.

IGAAP (AS 6)

- Useful life MAY be reviewed periodic

- Change in depn method will be treated as change in accounting policy.

Carve Out in Ind AS 101Use of carrying cost of Property, Plant and Equipment on the date of transition of First-time Adoption of Ind AS is permitted

IFRS 1 : Items of Property, Plant and Equipment shall be determined by applying IAS 16 retrospectively or the same should be recorded at fair value on the date of transition.

In case of old companies retrospective application of Ind AS 16 or fair values at the date of transition to determine deemed cost may not be possible for old assets.

Accordingly, Ind AS 101, First-time Adoption of Ind AS, provides relief that an entity may use carrying values of all items of PPE on the date of transition in accordance with previous GAAP as an acceptable starting point under Ind AS.

Disclosures

• The measurement bases (for example cost or revaluation)• The depreciation methods used (for example, straight-line

method or declining balance method).• The useful lives or the depreciation rates used.• The gross carrying amount (cost or revalued amount) at

both the beginning and end of the period. • A reconciliation of the carrying amount at the beginning and

end of the period separately disclosing:- Additions- Acquisitions through business combinations.- Revaluation increases or decreases.

• Existence and amounts of restrictions on title and property, plant and equipment pledged as security for liabilities.

Property, Plant and Equipment

I GAAP Ind AS

Component Approach

Para 8.3 of AS 10 just touch upon that the accounting for an item of fixed asset may be improved if the total exp there on is allocated to its component parts

Ind AS 16 mandates component accounting. Under this approach, each major part of an item of PPE with a cost that is significant, is depreciated separately.

Cost of major inspections and overhauls.

Generally expensed when incurred

Capitalized only when it is probable that it will give rise to future economic benefits

Asset dismantle, removal or restoration cost

No specific reference except AS 29 regarding the provision

Present value of such cost, the obligation of which an entity incurs as a consequence of installing the item, is included as part of the cost of PPE.

Ind AS Vs IGAAP – some key differences

Property ,plantand equipment

I GAAP Ind AS

Revaluation Revaluation is permitted. No specific requirement on frequency of revaluation.

Selection of asset for revaluation to be made on systematic basis (eg. a unit and not entire class)

Revaluation is required to becarried out at sufficient regularity.

If revaluation model is adopted, the entire class of PPE has to be revalued.

Depreciation Method

Earlier depreciation needs to be charged as per schedule XIV of CA, 1956 but as per Schedule II of CA 2013 depreciation is to be calculated as per useful life and the same has been specified in it.

Depreciation to be calculated based on Useful life

Property ,plantand equipment

I GAAP Ind AS

Change in depreciation method

Treated as change in accounting policy

Treated as change in accounting estimate

Reassessment of depreciation method, useful life, and residual value

No specific requirement Reassessed at each balancesheet date.

Deferred payment terms

No specific guidance under AS 10 for Assets acquired on deferred settlement terms.

Generally financing element is not separated

Difference between the purchase price under normal credit terms and the amount paid, is recognised as interest expense over the period of the financing.

AG Engineering Ltd has purchased a new item of manufacturingmachinery for their industrial printing operation.

It is a RTX 3000 printing press, which has been imported from anoverseas supplier and will be transported from the docks to thefactory by a convoy of heavy vehicles due to its large size and weight.

The asset will be installed in the existing factory following thedismantling and removal of the old press, which is now obsoleteowing to advances in technology.

Determine if the following costs can be added to the invoicedpurchase price and included in the initial recognition of the cost ofthe asset

Case Study

State whether following cost should be Included or Excluded in PPE :-

Include/ Exclude

1 A trade discount received of 5 % of the purchase price of the asset

2 VAT paid on the purchase

3 Interest paid on a short term loan taken to provide the necessary cash for payment of the purchase price

4 Import duties paid

5 Shipping costs and cost of road transport

6 Insurance for the shipping

7 An economic development rebate from the state

Include

Exclude

Exclude

Include

Include

Include

Include

State whether following cost should be Included or Excluded in PPE :-

Include/ Exclude

8 Cost of laying a new concrete slab and installing special rubber mounted footings for the new press in order to reduce vibration during use

9 Hire of a crane to transfer the press from the vehicles into the factory

10 Costs associated with removing a section of the factory roof to allow the machine to be dropped into place and subsequently refitting the roof

11 Cost of installing soundproofing in the roof at the same time in order to provide protection for workers in other parts of the factory building

12 Professional fees charged by consulting engineer for overseeing the installation process

13 Electricians fees for connecting the press to the power supply

14 A portion of the operating costs (salaries, office expenses) of the purchasing department

Include

Include

Include

Exclude

Include

Include

Exclude

State whether following cost should be Included or Excluded in PPE :-

Include/ Exclude

15 Costs of materials (papers and inks) used in calibrating the machine and setting it up for operation

16 Costs of training the operators of the new machine

17 A portion of the inefficiencies in production for the first month of use while the operators became comfortable with using the machine

Include

Exclude

Exclude

Thank YouPresented by :

Alok Kumar Garg

CA, CS, CIFRS (ICAI), B.Com (Hons.)

dial - 999 999 1543

email - caalokgarg@gmail.com