Ind AS 16 prescribes the accounting treatment for Property and P&E (Plant, and Equipment). The principal issues covered in the standard includes: –
- Timing of recognizing an asset
- Determining the carrying amounts of the assets
- Depreciation to be recognized in the financial statements
Applicability and Scope
Ind AS 16 Property Plant Equipment is applicable to all Property and P&E (Plant & Equipment) unless and until any other accounting standard asks for a different treatment.
Ind AS 16 Property Plant Equipment is not applicable in the following cases:
(i) Property and P&E (Plant & Equipment) which are classified as held for sale as per Ind AS 105
(ii) Biological assets which are related to agricultural activities except bearer plants
(iii) The measurement and recognition of exploration and evaluation assets
(iv) Mineral rights and reserves like oil, natural gas and other such non-regenerative resources
The cost of any item of PPE must be recognized as an asset only when:
(a) It is apparent that the future economic benefits related to such asset would flow to the business; and
(b) Cost of such asset could be reliably measured
Constituents of cost
The cost of the item of PPE includes:
(a) The purchase price, which includes the import duties and any non-refundable taxes on such purchase, after deducting rebates and trade discounts
(b) Costs which are directly attributable to bringing assets to the condition and location essential for it to operate in a manner as intended by the management
(c) Initial estimate of costs of removing and dismantling an item and restoring a site where it is located
Measurement after recognition
A business must choose cost model or revaluation model as the accounting policy and should apply such policy to its entire class of PPE.
After recognizing an asset, PPE should be carried at the cost as reduced by the accumulated depreciation and accumulated impairment losses (if any).
After recognizing an asset, PPE whose fair value could be reliably measured should be carried at the revalued amount, being the fair value at revaluation date and reduced by successively accumulated depreciation and successive accumulated impairment losses (if any).
(a) Revaluations must be made with adequate regularity for ensuring that carrying amount doesn’t differ substantially from that which would be determined if fair value at end of the reporting period is used
(b) In case an item of PPE is revalued, whole class of such PPE to which such asset belongs should be revalued
(c) In case the carrying amount of an asset increases due to revaluation, such increase should be credited to other comprehensive income and should be accumulated in equity. However, such increase should be recognized in P/L statement to the extent of reversal of a revaluation decrease of similar asset recognized previously in the P/L statement
(d) In case the carrying amount of an asset is decreased due to revaluation, such decrease should be recognized in the P/L statement. However, such decrease should be debited to other comprehensive income to the extent of credit balances available in revaluation surplus with respect to such similar asset
Each part of PPE with a cost which is substantial with respect to the total cost of the PPE should be separately depreciated. The amount of depreciation should be allocated on an orderly basis over the useful life of an asset.
The standard also requires:
- The method of depreciation used should reflect an asset’s pattern of future economic benefits
- At each balance sheet date, three standard requires review of
(i) Residual value and the useful life of assets
(ii) Depreciation method employed
The carrying amount of items of PPE should be derecognized:
(a) At the time of their disposal; or
(b) When there are no future economic benefits anticipated from the use or disposal of such asset
Any gain or loss arising from such derecognition should be included in the P/L statement when such item is derecognized. Gains arising from such derecognition shouldn’t be classified as part of revenue.
Ind AS 16 prescribes financial statements should disclose, for every class of PPE:
(i) Measurement basis for determining carrying amount
(ii) Depreciation methods used
(iii) Depreciation rates/ Useful lives of the assets
(iv) Aggregate carrying amount and accrued depreciation at the start and at the end of period
(v) Existence and value of restrictions on the title and PPE pledged as collateral for liabilities
(vi) Amount of expenditure recognized in carrying amount of an item of PPE during its construction
(vii) Amount with respect to contractual commitment for acquisition of PPE
Major differences between Ind AS 16 & 6
||Ind AS 16 Property Plant Equipment
||AS 10 & 6
|Change in the methods of depreciation
||Ind AS 16 considers such change as changes in the accounting estimate and is applied prospectively.
||AS 10 necessitates retrospective recalculation of the depreciation and accounted for prospectively. This change is considered as the changes in accounting policy.
|Reviewing residual value
||The residual value must be reviewed at the end of every financial year at least and, any change must be accounted for as changes in the accounting estimate.
||As per AS 10, estimates with respect to residual value aren’t required to be updated and reviewed.
|Reassessing the useful life
||Ind AS 16 requires reviewing at the end of every financial year and applied prospectively.
||AS 10 required periodical review and prospective application.
|Government grant received for PPE
||Ind AS doesn’t allow the same.
||AS 12 gives an option to reduce the grant so received from gross value of such asset
|Cost of major Inspections
||As per Ind AS 16, the cost of any major inspections must be recognized in carrying the amount of the PPE
||As per AS 10, the cost of major inspections are usually expensed as and when they’re incurred.