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

2. OBJECTIVE To lay down accounting for PPE over its life
Initial recognition
Subsequent measurement – carrying amounts
Depreciation & impairment
Derecognition

3. SCOPE
IAS 16 to be applied to PPE except when another standard requires or permits a different accounting treatment e.g.
PPE held for sale as per IFRS 5
Biological assets related to agricultural activity (IAS 41)
Exploration & evaluation of mineral assets (IFRS 6)
Mineral rights & mineral reserves
Standard applies to PPE used to develop b) c) & d)

4. 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

5. 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

6. 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

7. RECOGNITION (CONTD.) Spare Parts
Usually carried as inventory & recognized in profit or loss when consumed
Major spare parts qualify as PPE when expected to be used during more than one period
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

8. INITIAL COSTS PPE acquired for safety or environmental reasons
Qualify for recognition or assets, because future economic benefits of related assets increase

9. 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

10. 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

11. 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

12. 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

13. 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)

14. 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

15. MEASUREMENT AT RECOGNITION (CONTD.)
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

16. MEASUREMENT AT RECOGNITION (CONTD.)
Costs Not Included
Costs incurred when capable of operating in the manner intended by management – has yet to be used or operated at less than full capacity
Initial operating losses,e.g.,when demand builds up
Costs of relocating or reorganizing part or all of an entity’s operations

17. MEASUREMENT AT RECOGNITION (CONTD.)
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

18. 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

19. MEASUREMENT OF COST Cash price equivalent
Deferred payment terms beyond normal credit period – interest expense/ capitalised
Exchange Transactions
Measured at FV unless
Exchange transaction lacks commercial substance or
FV of neither the asset acquired or given up can be measured reliably
In such cases cost measured at carrying amt of asset given up

20. 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

21. MEASUREMENT OF COST (CONTD.)
PPE held under finance lease by lessee
Cost as per IAS 17
Govt.Grants
Cost reduced by grant (IAS 20)
(This treatment not available under IndAS 16)
(Alternative treatment – set up the grant as deferred income)

22. MEASUREMENT AFTER RECOGNITION
Choose either cost model or revaluation model as accounting policy
Apply that policy to entire class
Cost Model
Cost less accumulated depreciation & any accumulated impairment losses

23. MEASUREMENT AFTER RECOGNITION (CONTD.)
Revaluation Model
PPE 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

24. MEASUREMENT AFTER RECOGNITION (CONTD.)
FV of land & Buildings
market based evidence – appraisal by professionally qualified valuers
Plant & Equipment
MV 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

25. MEASUREMENT AFTER RECOGNITION (CONTD.)
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.

26. MEASUREMENT AFTER RECOGNITION (CONTD.)
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

27. MEASUREMENT AFTER RECOGNITION (CONTD.)
Entire Classes to be revalued
Classes (examples)
Land
Land & Buildings
Machinery
Ships
Aircrafts
Motor Vehicles
Furniture & fixtures
Office equipment

28. MEASUREMENT AFTER RECOGNITION (CONTD.)
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

29. MEASUREMENT AFTER RECOGNITION (CONTD.)
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

30. MEASUREMENT AFTER RECOGNITION (CONTD.)
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

31. MEASUREMENT AFTER RECOGNITION (CONTD.)
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

32. 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

33. 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

34. DEPRECIATION (CONTD.) Depreciable Amt.& Depreciable Period
Dep. 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

35. 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

36. 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

37. 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

38. DEPRECIATION (CONTD.)
Land & Buildings – separable assets and are accounted for separately even when acquired together
Land generally not depreciated unless it has limited life

39. 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

40. DEPRECIATION (CONTD.) 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

41. DEPRECIATION (CONTD.) Impairment Apply IAS 36
Compensation for Impairment
From third parties include in Profit or Loss when compensation becomes receivable

42. DE-RECOGNITION On disposal (sale,donation,given on finance lease, or
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

43. 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

44. DISCLOSURES
Para 73 to 79 of IAS 16

45. Main differences with Indian GAAP
Cost of PPE
Similar 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

46. 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

47. 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

48. 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

49. 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

50. 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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