1. IAS 16: Property, Plant and Equipment (PPE)
IFRS Training Program
Day 3 – December 4, 2008
Submitted by – Mukesh Thakur
IAS 16: Property, Plant and Equipment (PPE)

2. Purpose of the Standard
To prescribe the accounting treatment for Property, Plant and Equipment (PPE)
The principal issues are
The timing of Recognition of the assets
The determination of their carrying amount and
The depreciation charge in relation to them

3. Scope Applies in accounting for PPE. Standard excludes PPE are
tangible items
that are held for
use in the production or supply of goods or services or
rentals to others, or
for administrative purpose
AND
are expected to be used during more than one period
Standard excludes
PPE for which separate Accounting treatment has been prescribed by any other Standard.

4. Recognition criteria
The cost of an item of PPE is recognised only and only if
It is probable that future economic benefit will flow to the entity and
The cost of the item can be measured reliably

5. Spare Parts and Servicing Equipment
If yes - it will qualify as PPE
If no - it will be charged to Expenses
It is major
It can be used only in connection with an item of PPE
Recognition Criteria is met

6. Subsequent Costs Replacement Costs Inspection Cost
Day to day expenses is charged to Profit and Loss Account as repair and maintenance.
Major replacement cost qualify as PPE if recognition criteria is met.
The carrying amount of those parts that are replaced is derecognised.
Inspection Cost
Where major regulation inspection is required to operate the item of PPE, the cost of such item will qualify as PPE if recognition criteria is met.
Any remaining carrying amount of the cost of previous inspection is derecognised.

7. Example
ABC & Co., has acquired a heavy road transporter at a cost of Rs. 100,000 (with no breakdown of component parts).
The estimated useful life is 10 years.
At the end of the sixth year, the power train requires replacement, as further maintenance is uneconomical due to the off-road time required. The remainder of the vehicle is perfectly road worthy and is expected to last for the next four years.
The cost of the new power train is Rs. 45,000.
Can the cost of new power train can be recognized as the asset, and if so, what treatment should be used?

8. Solution
The new power train will produce economic benefits to the ABC & Co.; and
Cost of the power train can be measured reliably. Hence, the item should be recognized as the asset.
The cost Rs. 45,000 of new power train will be added to the carrying amount.
The original invoice of the transporter did not specify the cost of the power train. Therefore, the cost of replacement Rs. 45,000 will be used as indicative price and discount to year 1, i.e., (45,000/ 1.05^6) = 33,500.
It is assumed that discount rate used is 5%.
- Revised Cost = (100, , ,000) = 111,500

9. Cost Price Comprises of
Measurement
An item of PPE is measured at COST
Cost Price Comprises of
Purchase Price
Costs directly Attributable to bringing the asset to location and condition intended by management
Initial estimate of dismantling the assets and restoring the site to its original condition

10. Measurement cont.
Only costs that are directly attributable may be capitalised. The standard lists type that are not directly attributable
Costs of opening new facility
Costs of introducing a new product or service
Costs of conducting business in a new location or with a new class of customer
Administration and other general overhead costs
Self Constructed assets is determined using the same principles as for an acquired asset.
Exchange of Assets
If fair value can be measured – cost will be measured at fair value.
If fair value can not be measured – cost will be recognised at carrying amount of asset given up.

11. Your turn!
ABC & Co., is installing a new plant at its production facility. It has incurred these costs:
Cost of the plant Rs. 250,000.
Initial delivery and handling cost Rs. 20,000.
Cost of site preparation Rs. 60,000.
Consultants used to advice on the acquisition Rs. 70,000.
Interest charges paid to supplier for deferred credit Rs. 20,000.
Estimated dismantling cost to be incurred after 7 years Rs. 30,000.
Operating losses before commercial production Rs. 40,000.
Find out the costs to be capitalized as per IAS-16?

12. Solution Particulars Cost Cost of the plant Rs. 250,000.
Initial delivery and handling cost Rs. 20,000.
Cost of site preparation Rs. 60,000.
Consultants used to advice on the acquisition Rs. 70,000.
Interest charges paid to supplier for deferred credit Rs. 20,000.
Estimated dismantling cost to be incurred after 7 years Rs. 30,000.
Operating losses before commercial production Rs. 40,000.
250,000
20,000
60,000
70,000
30,000 -
Total Costs
450,000

13. Measurement after recognition
An entity may choose either the cost model or the revaluation model as its accounting policy
Cost Model
Carrying amount =
Cost – (Accumulated Depreciation + Accumulated Impairment Loss)
Revaluation Model
Revalued amount – (Accumulated Depreciation + Accumulated Impairment Loss)

14. Revaluation Model
Revaluation will be made at sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period.
If an item of PPE is revalued, the entire class of PPE to which that asset belongs will be revalued.
Revaluation Gain
Surplus from Revaluation is credited directly to equity under heading ‘Revaluation Surplus’. However if revaluation reverses a revaluation decrease on the same asset previously recognised as an expense, it will credited to Profit and Loss Account to that extent.
i.e. Amount to be transferred to revaluation reserve =
Revaluation increase (-) Earlier revaluation decrease recognised as expenses.
Standard states that revaluation surplus included in equity may be transferred directly to retained earnings when the surplus is realised (i.e. when asset is derecognised). This transfer is made through reserves and surplus and not through profit and loss account.

15. Revaluation Model cont…
Let us take an example:
A company has a policy of revaluing its PPE. At value of asset was Rs Its useful life is 10 years and it is depreciated on straight line basis to nil residual value. It is revalued downward to Rs at
At market value has risen to Rs
2007
2008
Cost/Valuation Brought forward
1000
850
Depreciation charge (1000/10); (850/9)
(100)
(94)
900
756
(Loss)/Gain on revaluation – Profit and Loss
(50) 44
Gain on Revaluation - Revaluation Surplus -
250
Carrying amount carried forward
1050

16. Revaluation Model cont…
Revaluation Losses
Revaluation Losses is charged against earlier revaluation surplus. Any balance of decrease in charged to Profit and Loss Account.
i.e. amount to be charged to the profit and loss =
Revaluation Decrease (-) Earlier revaluation increase.
Better to take an example again!
Cost of the asset as on = 100 Useful life = 10 years
Revalued amount at = 135 Method of Dep. = SLM
Revalued amount at = 50

17. Revaluation Model cont…
Alternative treatment
Standard also permits transfer to be made from revaluation surplus to retained earning as the asset is used and the surplus is realized. The surplus may be realized as the asset is depreciated. In that case, in 2008 Rs. 5 would have been transferred from revaluation reserve to retained earning. The balance left in the revaluation amount would be Rs. 40. Accordingly, out of revaluation loss of Rs. 70 , charge against revaluation reserve would be Rs. 40 and Rs. 30 would be charged to Profit and Loss Account.
2007
2008
Cost
100
135
Depreciation
(10)
(15) 90
120
Gain on Revaluation – Revaluation Surplus 45
(45)
(Loss)/Gain on Revaluation – Profit and Loss -
(25)
Carrying amount carried forward 50

18. Depreciation
The standard prescribe following principles for depreciation
Each part of an item of PPE with a cost that is significant in relation to the total cost of the item will be depreciated separately.
The depreciation charge for each year will be recognised in profit and loss account unless it is included in carrying amount of another asset.
The depreciable amount of an asset will be allocated on a systematic basis over useful life.
The residual value and useful life of an asset will be reviewed at least each financial year end.
Any difference in estimates from previous expectation will be accounted for as a change in accounting estimates i.e. changes will be applied prospectively.

19. Depreciation Method
The standard does not prescribe any depreciation method. An entity may choose any method as per the nature of business. However method adopted by the entity should reflect the following principles:
The depreciation method will reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.
The depreciation method applied will be reviewed at each financial year end. Any change from the previous year will be treated as change in accounting estimates.

20. IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities
Cost model:
- Changes in liability will be added/deducted from asset cost in current period.
- No negative carrying amount possible; any excess recognised immediately in profit or loss.
- Increase in carrying amount triggers consideration of impairment. Calculation of recoverable amount might be necessary.

21. previous revaluation deficit) (except credit balance
IFIRC 1
Revaluation model:
Change in liability does not affect valuation of asset (impact on valuation reserve)
Change in liability: indication that asset might have to be revalued.
Revaluation surplus
(except reversal of
previous revaluation deficit)
Decrease in liability
Profit or loss
(except credit balance
remaining in
revaluation surplus)
Increase in liability

22. Disclosure
For each class of PPE, following should be disclosed in Financial Statement
The measurement base used for gross carrying amount
The depreciation method used
The useful lives or the depreciation rates used
The Gross Carrying amount and the accumulated loss at the beginning and at the end of the period
A reconciliation of carrying amount at the beginning and end of the period showing
Additions
Assets held for sale (IFRS 5)
Acquisition through business combination
Increase or decrease from revaluation or impairment
Depreciation
Exchange differences arising on the retranslation of the financial statement of a foreign entity

23. Disclosure cont… Other Disclosures Other changes.
The carrying amount at the beginning and end of the period.
Other Disclosures
The existence and amount of restrictions on title, and PPE pledged as securities for liabilities.
Amount of expenditure recognised in the carrying amount of an item of PPE in the course of construction.
The amount of contractual commitments for the acquisition of PPE.

24. Extracts from Model Accounts

25. Extracts of Significant Accounting Policies

26. Extracts of Significant Accounting Policies cont…

30. Comparison with Indian GAAP10 AS 6 16
IAS

31. Comparison with Indian GAAP
IAS 16
IGAAP
Cost
Cost includes
Initial estimates of dismantling and removing the item and restoring the site on which it is located.
There is no guideline for capitalisation of dismantling and site restoration cost.
Borrowing cost (before , it should be expensed off immediately)
Capitalisation of borrowing cost is mandatory as per AS 16.
Component Accounting
Each major part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of an item is depreciated mandatorily separate.
There is one line in AS 10 that states that accounting for tangible fixed assets may be improved if total cost thereof is allocated to its various parts.

32. Comparison with Indian GAAP
IAS 16
IGAAP
Subsequent cost
The cost of replacing of parts of assets is capitalized if recognition criteria are met. The carrying amount of those parts that is replaced is derecognized simultaneously.
There is no requirement of decapitalizing the carrying amount of replaced part.
If major inspection is carried out, it is capitalized if the recognition criteria are met. The remaining carrying amount of previous inspection is derecognized.

33. Comparison with Indian GAAP
IAS 16
IGAAP
Revaluation
IAS 16 gives option to an entity to choose either cost less depreciation method or revaluation method. If an item of property, plant and equipment is revalued, the entire class to which that asset belongs should be revalued.
Revaluation approach adopted is ad-hoc in nature. When revaluation do not cover all the asset of the given class, it is appropriate that the selection of the asset to be revalued be made on systematic basis.
Depreciation on revalued portion cannot be recouped out of revaluation reserve.
Depreciation on revalued portion can be recouped out of revaluation reserve.
Revaluation must be kept up to date so that the carrying amount does not differ materially from the fair value. Where policy of revaluation is adopted, regular revaluation of all PPE should be done.
There is no such requirement.

34. Comparison with Indian GAAP
IAS 16
IGAAP
Depreciation
Each part of an item of PPE with a cost that is significant in relation to the total cost of an item will be depreciated separately.
The depreciable amount of each asset should be allocated on a systematic basis. All companies need to ensure minimum depreciation as per rates prescribed in Schedule XIV to the Companies Act. There is no requirement for separate depreciation for each significant part of the asset.
The residual value and useful life of an asset is reviewed at least each financial year end and if expectations differ from previous estimates, the changes will be accounted for as a change in accounting estimates.
There is no need for annual review of estimates of useful life and residual value. It may be reviewed periodically.

35. Comparison with Indian GAAP
Methods of Depreciation
Various method can be used like straight line method, diminishing balance method, unit of production method etc.
Permitted methods of depreciation are straight line method and written down value method.
Periodic review of depreciation method is required.
Depreciation method selected should be applied consistently from period to period. Change is method should be made only in prescribed situation.
Change in depreciation method is treated as change in accounting estimates and accounted for prospectively.
Change in method is treated as change in accounting policy and is accounted retrospectively.

36. Comparison with Indian GAAP
IAS 16
IGAAP
Spare parts, servicing equipment, etc.
Spare parts are usually carried as inventories and recognised in profit and loss as consumed. Major spare parts qualify as PPE if entity expects to use them during more than one period. If spare parts can be used only in connection with PPE, they are accounted for as PPE.
Machinery spares are usually charged to profit and loss account as and when consumed. If such items can only be used in connection of fixed assets and their use is expected to be irregular, it may be appropriate to allocate the total cost on a systematic basis over a period not exceeding the useful life of the principal asset.
Servicing equipments are usually carried as inventory and recognised in profit and loss account as consumed.
Servicing equipments are normally capitalized.

37. THANK YOU !!