Ind As 16 - Property Plant and Equipment

Question 1

What is the scope of the standard? and what are the cases or situations where the standard does not apply?

Answer 1

• This Standard shall be applied in accounting for property, plant and equipment except when another Standard requires or permits a different accounting treatment.
• This Standard does not apply to:

1. PPE classified as held for sale (as per Ind AS 105)
2. Biological assets related to agricultural activity other than bearer plants (Ind AS 41).
3. Recognition and measurement of exploration and evaluation assets (Ind AS 106)
4. Mineral rights and mineral reserves such as oil, natural gas and similar non regenerative resources

Question 2

What is the basic definition of Property, Plant and Equipment and what are it’s inclusions and exclusions from the definition?

Answer 2

Property, plant and equipment are tangible items that:

a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
b) are expected to be used during more than one period

Question 3

What is the definition of the term bearer plant and what are the situations where Ind As 41 shall apply instead of Ind As 16?

Answer 3

A bearer plant is a living plant that:

(a) is used in the production or supply of agricultural produce;
(b) is expected to bear produce for more than one period; and
(c) has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.

If it fails to satisfy any one of the conditions as above, it will be considered to be an agricultural produce and will be covered under Ind As 41 accordingly.

Question 4

What is the general recognition criteria for recognition of property, plant and equipment as per Ind As 16?

Answer 4

The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:

a) it is probable that future economic benefits associated with the item will flow to the entity; and
b) the cost of the item can be measured reliably.

Question 5

What are the various components of cost as per measurement at initial recognition of an acquired asset?

Answer 5

The cost of an item of property, plant and equipment comprises:
a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates;

b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management; and
c) the initial estimate of the costs of dismantling and removing the item and restoring the site (We generally create provision in addition to the above initial cost as PV of dismantling obligations for the above and unwind the discount as finance cost over the period of usage of the PPE) on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.

Question 6

What are some examples of costs that are not costs of an item of property, plant and equipment?

Answer 6

These charts come in handy when solving problems in relation to the same.

Question 7

What is the cost of self constructed asset as per the provisions of Ind As 16?

Answer 7

The cost of a self-constructed asset is determined using the same principles as for an acquired asset. If an entity makes similar assets for sale in the normal course of business, the cost of the asset is usually the same as the cost of constructing an asset for sale. Therefore, any internal profits are eliminated in arriving at such costs

Similarly, the cost of abnormal amounts of wasted material, labour, or other resources incurred in self-constructing an asset is not included in the cost of the asset.

Ind AS 23 ‘Borrowing Costs’, establishes criteria for the recognition of interest as a component(That is when it incurred for a qualifying asset) of the carrying amount of a self constructed item of property, plant and equipment.

Question 8

What is the standard that need to applied and how it needs to be applied when it is in relation to Cost of dismantling, removal and site restoration?

Answer 8

Cost incurred by an entity in respect of obligation for dismantling, removing and restoring the site on which an item of property, plant and equipment is located are recognized and measured in accordance with Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets.

If the obligations are incurred when the asset is acquired, or during a period when the item is used other than to produce inventories, they are included in the cost of the item property, plant and equipment.

Question 9

What is the treatment for measuring the cost of incidental operations as per Ind As 16?

Answer 9

Some operations occur in connection with the construction or development of an item of property, plant and equipment, but are not necessary to bring the item to the location and condition necessary for it to be capable of operating in the manner intended by management.

Question 10

What are some examples of cost which should not be included in the carrying amount of an item of PPE in relation to cessation of capitalization?

Answer 10

Question 11

What about maintenance expenses (i.e) purchase of five year maintenance contract with the vendor? will that be included in the cost of the PPE?

Answer 11

No, since maintenance expenditure is a subsequent expenditure after the asset is ready for use, hence cannot be capitalized.

Question 12

What is the treatment of settlement discount, where discount is provided on the condition of early payment for the supply being made?

Answer 12

Settlement discount is in the nature of cash discount and hence should be taken to PL directly and cannot be capitalized. And this cannot be considered as deferred payment of consideration where the credit period is less than 1 month or so.

Question 13

What is the treatment of Testing cost? is there any difference between pre production and post production testing cost as per Ind AS 16?

Answer 13

The pre production testing cost has to be capitalized, whereas the an post production cost incurred after making the asset ready for used has to be expensed off

Question 14

What is the treatment of material cost incurred on PPE, when the same is spoiled or amount was additionally spent on the materials due to any faulty design work? will that be treated as normal or abnormal loss? what is the treatment under the different scenario as stated aforesaid?

Answer 14

1. Any cost which is incurred abnormally and which we consider to be a loss has to be reduced from the cost of the asset and not be part of the cost of PPE.
2. But, in case of a normal loss which is expected, the same can be added to the cost of the PPE.

Question 15

What is the treatment of borrowing cost in relation to the self constructed PPE as per IND as 16?

Answer 15

1. First, we have to see the question for the construction period of the asset till the asset is ready for use, and we should see whether it is considered to be a qualifying asset or not?
2. As seen before, only BC relating to QA will be capitalized as part of the cost of the asset.
3. Generally the period of construction for the purpose of classifying QA is 12 months or more, but if the question specifically mentions it to be a qualifying asset we consider that only even when period of construction is less than 12 months.

Question 16

What is the treatment of borrowing cost when there is an interruption in the construction of the qualifying asset?

Answer 16

1. This has to be read along with IND AS 23, where we need to see whether the interruption is of such nature that require suspension of capitalization of BC in the books of accounts.
2. The key word is whether it is an extended interruption or not, if it is not we can continue to capitalize the borrowing cost accordingly.

Question 17

Under what head, the provision for site restoration and the unwinding of the finance cost in relation to the site restoration cost has to be recognised?

Answer 17

It has to be shown under Non current liabilities along with the addition to unwind the discount(Finance cost) over the period of the usage of the asset.

Question 18

what is the treatment of the following cost per the provisions of INDAS 16?

1. An economic development rebate from the state
2. cost of training the operators of the new machine
3. portion of inefficiencies in production for the first month of use while the operators become comfortable with using the machine

Answer 18

1. It will either be credited to deferred grant a/c as per INDAS 20 or be deducted from the cost.
2. Expensed to PL
3. Expensed to PL (cost incurred after asset is ready) for use.

Question 19

What is the treatment when there is a change in the estimate of the site restoration cost or change in estimate of the number of years or change in the estimate of the discount rate etc?

Answer 19

1. the present value of changes in the estimate should be adjusted against the cost of PPR( and not in PL or Finance cost accordingly) in the year when the estimate changes.
2. This is due to the fact that provision is due to increase in the estimated expenditure and not due to passage of time merely.
3. Change in provision make the asset more costlier or cheaper in the future and hence the PV of change has to be attributed to the asset only and cannot be part of any other cost including Finance cost etc.

Question 20

What are some important principles that need to be kept in mind in relation to payment deferred beyond normal credit term transactions?

Answer 20

1. The cost of an item of PPE is the cash price equivalent at the initial recognition date where the payment terms goes beyond 12 months to reasonably interpret the same as a financing transaction instead of a discount.
2. The difference between cash price equivalent and the total payment is recognised as interest over the period of credit unless such interest is capitalised in accordance with Ind AS 23.

Question 21

Give examples of journal entries that has to be passed in relation to payment deferred beyond normal credit terms for cash price equivalent and Interest portion?

Answer 21

• See how the cash price equivalent is calculated
• Also see how the interest portion and the accounts payable portion is derived from the working notes provided in Illustration 1.

Question 22

What are the procedures for recognition of values in relation to exchange of assets for a transaction that has or lacks commercial substance?

Answer 22

1. Has commercial substance - PPE has to be recorded at fair value - that is fair value of the asset given up is used to measure the cost of the asset received(unless the fair value of the asset received is more clearly evident.) - Debit transaction.
2. From the debit transaction of fair value - any cash received(reduce) or paid(add) has to be made for and gain or loss has to be arrived for transactions having commercial substance.
3. The credit transaction, that is the for the asset received always have to make at WDV value of the asset given up only.
4. The carrying amount of an item of property, plant and equipment may be reduced by Government grants in accordance with Ind AS 20, Accounting for Government Grants and Disclosure of Government Assistance.
5. Lacks commercial substance - PPE to be recorded at WDV of the assets given up - No gain will be recorded here.

Question 23

what is the treatment of subsequent expenditure in relation to Repairs and Maintenance(day to day) and Minor Replacements?

Answer 23

When an expense increases life or increasing the efficiency beyond originally assessed, then in that case it has to be capitalized accordingly.

Question 24

What is the recognition of subsequent measurement of cost in relation to major inspections or overhauls in relation to an item of PPE?

Answer 24

WDV of asset + Cost of new asset - WDV of old part = Revised WDV

Question 25

What is the treatment of subsequent expenditure in relation to repair of damaged asset?

Answer 25

1. When asset is impaired(This will be decided as per the provisions of IND AS 36) at the time of damage - Subsequent repair cost is capitalized
2. When asset is not impaired at the time of damage - Subsequent repair cost has to be expensed to PL

Question 26

What are the methods or alternative bases available for measurement after recognition of the items of PPE?

Answer 26

1. Cost Model - After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses.
2. Revaluation model - After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably is carried at a revalued amount, being its fair value at the date of the revaluation.
3. Revaluations are required to be carried out with 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.

Question 27

What are the frequency of revaluation according to the provisions of IND AS 16- revaluation model of accounting?

Answer 27

Question 28

What is the procedure for adjusting of accumulated depreciation at the date of revaluation(Only applicable where the company has prepared PPE at original cost and there is a separate accumulated depreciation account?

Answer 28

See how these alternative methods have been worked out easily in Bhavik Book Question 13 - See solution book for answer to this question

Question 29

How are the revaluation being made? either on the whole class of assets or based on selective class of assets within a class etc?

Answer 29

• If an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs shall be revalued.
• a grouping of assets of a similar nature and use in an entity’s operations.
• items within a class of property, plant and equipment are revalued simultaneously to avoid selective revaluation of assets
• However, a class of assets may be revalued on a rolling basis provided revaluation of the class of assets is completed within a short period.

Question 30

What is the treatment of Surplus or deficit arising on revaluation of assets as per IND AS 16?

Answer 30

• If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus.
• However, the increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss.
• If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss.
• However, the decrease shall be recognised in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset.
• The decrease recognised in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus.

Question 31

What is the concept of component accounting as per the provisions of IND AS 16

Answer 31

1. An entity allocates the amount initially recognized in respect of an item of property, plant and equipment to its significant parts and depreciates separately each such part.
2. Such parts may be grouped in determining the depreciation charge.

Question 32

What is the meaning of major component in the context of component accounting as per IND AS 16?

Answer 32

1. If the components are major (unless give, a component is always assumed to be major
2. and components have a separate useful life.
3. The depreciation on each part should be based on the useful life of the part. However if the life of the part exceeds the remaining life of the original asset, then it would be appropriate to depreciate the part over the life of the part or remaining useful life of the asset whichever is shorter.

Question 33

What is the period from the depreciation charge must commence and when depreciation will ceased as per the provisions of IND AS 16?

Answer 33

Question 34

How the depreciation method has to be selected? what is the treatment when there is a change in the method of depreciation - will it be change in the policy or change in estimate?

Answer 34

• The depreciation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.
• The depreciation method applied to an asset is reviewed at least at each financial year-end and, if there has been a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset, the method should be changed to reflect the changed pattern
• Such a change is accounted for as a change in an accounting estimate in accordance with Ind AS 8.

Question 35

What are some general rules when it comes to charging of depreciation vis a vis in relation to residual value and fair value of an asset?

Answer 35

These broad rules are very important to keep in mind while solving problems. These are some basic stuff which needs to be kept in check.

Question 36

What is the frequency of review of useful life and residual value and when there are any changes, should the same be applied prospectively or retrospectively?

Answer 36

The useful life and residual value should be reviewed annually and any changes to the same are treated as change in accounting estimates and hence should be applied prospectively.

Question 37

What are certain important points when calculation provision for decommissioning under the revaluation model?

Answer 37

• While calculating the amount of revaluation during the year, we usually compare the fair value with WDV. However, whenever there are dismantling obligations, the buyer will quote the fair value considering the assets fair value as well as present value of decommissioning liability.
• This is because when the buyer purchases the asset, he would also take over the dismantling obligations. Therefore the fair value given in the question would usually be the value for net assets( Asset - Decommissioning obligation) unless otherwise given for.
• Fair value of asset only - PV of decommissioning liability = Fair value of net assets(given in question)
• The fair value has to be back calculated by substituting the given fair value for net asset and the present value of dismantling liability.