Ind AS-16: Property, Plant and Equipment

30/08/2021 1 By indiafreenotes

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:

  • Biological assets which are related to agricultural activities except bearer plants.
  • Property and P&E (Plant & Equipment) which are classified as held for sale as per Ind AS 105.
  • Mineral rights and reserves like oil, natural gas and other such non-regenerative resources.
  • The measurement and recognition of exploration and evaluation assets.

Constituents of cost

The cost of the item of PPE includes:

(a) 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.

(b) The purchase price, which includes the import duties and any non-refundable taxes on such purchase, after deducting rebates and trade discounts.

(c) Initial estimate of costs of removing and dismantling an item and restoring a site where it is located.

Recognition

Recognition simply means incorporation of item in the business’s accounts, in this case as a non-current asset. The recognition of property, plant & equipment depends on two criteria:

a) It is probable that future economic benefits associated with these assets will flow to the entity.

b) Cost can be measured reliable.

Initial Measurement

The cost of items of Property, plant & equipment compromises:

  • Purchase price, including import duties, non-refundable purchase taxes, less trade discount & rebate.
  • Initial estimates of cost of dismantling/decommissioning removing, & site restoration at present value if the entity has an obligation that it incurs on acquisition of the asset or as a result of using the asset other than to produce inventories.
  • Cost directly attributable to bringing the asset to the location & condition necessary for it to be used in a manner intended by management.

Measurement subsequent to initial recognition

The standard offers two possible treatments here, essentially a choice between keeping an asset recorded at cost model or revaluation model. However, the same policy must be applied to each entire class of property, plant and equipment.

Cost Model carry the asset at its cost less depreciation and any accumulated impairment losses.

Revaluation Model carry the assets at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses.  The revised IAS 16 makes clear that the revaluation model is available only if the fair value of the item can be measured reliably.

Revaluation Model

The market value of Land & Buildings usually represents the fair value, assuming existing use and line of business. Such valuations are usually undertaken by professionally qualified valuers.

In case of plant & equipment, fair value is usually market value. If the market value is not available, fair value is estimated using depreciated replacement cost.

The frequency of valuation depends on the volatility of the fair values of the individual items of property, plant and equipment. The more volatile the fair value, the more frequently revaluations should be carried out. Where the current fair value is very different from the carrying amount then a revaluation should be carried out. Most importantly, when an item of property, plant & equipment is revalued, the whole class of assets to which it belongs should be revalued.

All the items within a class should be revalued at the same time, to prevent selective revaluation of the certain assets and to avoid disclosing a mixture of costs and values from different dates in the financial statements. Items within a class may be revalued on a rolling basis within short period of time provided revaluation are kept upto date.

Accounting for a revaluation

How should any increase in value to be treated when a revaluation takes place? The debit will be the increase in value in the statement of financial position, but what about the credit? IAS 16 required the increase to be credited to other comprehensive income and accumulated in a revaluation surplus (part of owner’s equity).

Debit: Assets Value (Statement of financial position)

Credit: Other comprehensive income (revaluation surplus)

Retirement & Disposals

When the assets are permanently withdrawn from the use, or sold or scrapped, and no future economic benefits are expected from its use or disposal, it should be withdrawn from the financial position. Gains or losses are the difference between the net disposal proceeds and the carrying amount of the asset. They should be recognized as income or expense in profit or loss.

Derecognition

Any entity is required to derecognize the carrying amount of an item of property, plant or equipment that it disposes of on the date the criteria for the sale in IFRS 15 would be met. This also applies to part of assets. An entity cannot classify as revenue a gain which it realizes on the disposal of an item of property, plant & equipment.

Depreciation

IAS 16 requires the depreciable amount of a depreciable asset to be allocated on a systematic basis to each accounting period during the useful life of the asset. Every part of an item of property, plant & equipment with a cost that is significant in relation to the total cost of the item must be depreciated separately.

There are situations where, over a period, an asset has increased in value, i.e. its current value is greater than the carrying amount in the financial statements. You might think that in such situation it would not be necessary to depreciate the asset. The standard states, however, that this is irrelevant, and that depreciation should still be charged to each accounting period, based on the depreciable amount, irrespective of a rise in value.

An entity is required to begin depreciating an item of property, plant and equipment when it is available for use and to continue depreciating it until it is derecognized even if it is idle during the period.

The following factors should be considered when estimating the useful life of a depreciable asset:

  • Expected physical wear and tear.
  • Legal or other limits on the use of the assets.

Disclosure Requirement

  • Depreciation method used.
  • Measurement bases used for determining gross carrying amount.
  • Useful lives or the depreciation rate used.
  • Reconciliation of carrying amount at the beginning and end of period.
  • Property, plant and equipment pledged as security for liabilities.
  • Amount of compensation from third parties for items of property, plant and equipment.
  • Amount of expenditure recognized in the course of construction
  • Contractual commitments for the acquisition of property, plant and equipment.
  • Gross carrying amount and accumulated depreciation at beginning and end of the period. Accumulated impairment losses are aggregated with accumulated depreciation.

Disclosure for revalued assets:

  • Whether an independent valuer was involved.
  • Effective date of revaluation.
  • Revaluation surplus, including movement and any restrictions on distribution of balance to shareholders.
  • Carrying amount of each class of revalued property, plant and equipment if the cost model had been applied.