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

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

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)

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

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

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

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

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

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

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

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

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

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)

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

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

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

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

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

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

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

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)

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

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

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

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

DISCLOSURES Para 73 to 79 of IAS 16

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

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

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

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

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

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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