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Ind AS 16 – Property,

Plant and Equipment


(PPE)
BY VAIBHAV JAIN
What is PPE? Not Applicable to…

 Tangible assets  PPE classified as held for sale - Ind As 105


 Held for use in  Biological assets other than Bearer Plants (discussed
 Producing goods later)
 Providing services  Exploration & Evaluation assets – Ind AS 106
 Rental to others  Mineral rights & reserves e.g. oil, natural gas & similar
non-regenerative resources (Industry Standards)
 Administration purposes
 PPE specified by other Ind AS e.g. Ind AS 17 for
 Expected to be used for >12 months.
Leases
Bearer Plants

 Plant used in production/supply of agricultural produce


 Expected to bear produce for >12 months
 Has a remote likelihood of being sold as agricultural produce, except for incidental
scrap sales.
Recognition
&
Measurement

Subsequent
Initial R&M
R&M

A.
B. Self Revaluation
Cash/Credit C. Barter Cost Model
Construction Model
purchase

Basic Purchase Price Cost (as earlier) Net Carrying Amt.


(+) Non refundable taxes & duties (+) directly attributable to Cost (as earlier)
(+) Initial delivery & handling costs asset or its construction (-) Accumulated depreciation
(+) site preparation costs (+) borrowing costs (Ind AS 23) (-) Accumulated Impairment Loss
(+) installation & test run costs (less: net Note: Exclude internal profits
proceeds of testing samples) & abnormal loss of resources
(+) professional fees
(+) borrowing costs (Ind AS 23)
(+) PV of decommissioning, restoration costs
Net Carrying Amt.
(+) Directly attributable costs to bring asset
Fair Value of PPE
to present location & condition Commercial Substance (+) Fair Value:
(-) Subsequent acc. depreciation
(-) Govt. grants (Ind AS 20) Yes: Fair value of asset given up OR Fair Value
(-) Subsequent acc. Impairment Loss
(-) Trade discounts/rebates of asset received, whichever is clearly evident
(Discussed Later)
[Note: General Admin Ohd. To be excluded] No: Carrying amount of asset given up
A. Questions on cash/credit purchase
A purchased P&M for 45,00,000/-. A balance of 5,00,000/- is still payable.
The supplier waived off this balance amount. What should be the
accounting treatment?
A purchased car on 01.04.11 for 10 million from B payable in 3 equal
5,00,000/- waived off is directly related to PPE & such price adjustment should be installments of 33,33,333/- (on 01.04.11, 31.03.12, 31.0313). B offers 5%
deducted from cost of PPE & not credited to P&L. discount if full payment made at sale. Implicit rate = 5.36%. Record
Journal Entries.
A took a building on lease for 25yrs. & spent 1cr. for renovation which took
1yr. How should the lease rent of 12lakh for that year be treated?
01.04.11 Car a/c ……….. Dr. 95,00,000
The improvements will be useful over the lease term and hence it should capitalize To Cash/Bank a/c 33,33,333
1cr. and depreciate over useful life of 25yrs. of lease term. To B a/c 61,66,667
31.03.12 Interest expense a/c ……….. Dr. 3,30,533
A ltd. Acquired generator for 20lakh & servicing equipment for 30lakh. Can B a/c (b.f.) ………………… Dr. 30,02,800
it capitalize service equipment? To Cash/Bank a/c 33,33,333
Yes, since it satisfies the definition of PPE. [61,66,667 X 5.36% = 3,30,533]
31.03.13 Interest expense a/c ……….. Dr. 1,69,467
ABC Ltd. Installed machine costing 25lakhs with life 3yrs. in rented
B a/c (b.f.) ………………… Dr. 31,63,867
premises. As per rental agreement, machine should be decommissioned &
To Cash/Bank a/c 33,33,334
building should be brought to original position. Co. incurs 4lakh at end of
(61,66,667–30,02,800)X5.36%= 169,467
3rd year for restoration. Borrowing rate = 10%.

PV of decommissioning cost = 4,00,000 X PVIF(10%, 3years) = 4,00,000 X 0.751


= 300,400/-
Therefore, cost of PPE = 25,00,000 + 300,400 = 28,00,400/-
B. Questions on self constructed assets
A cement manufacturing co. constructed a new building & cost
as per books is 25lakhs.
Additional Info:
(i) 100 bags of cement for building was taken from C. Questions on Barter
warehouse. SP of cement is 500 per bag & cost is 400 per A exchanges car X with book value 13,000/- (fair value 13,250/-
bag. The accountant capitalized 5lakhs to cost of ) for cash 150/- and car Y (fair value 13,1000/-).
building.
(ii) Before construction, a nearby site was rented for parking Since commercial substance does not exist, we measure transaction
vehicles for 3months. Rental income earned 25,000/-. The at carrying amount of asset given up i.e. car X.
accountant deducted income from the cost of building. Cash a/c ……. Dr. 150
Is this accounting treatment correct? Car Y a/c …….. Dr. 12,850 (b.f.)
To Car X a/c 13,000

(i) The accountant capitalized 5,00,000/- incorrectly since internal ABC Ltd. traded an old machine with carrying amt. of 16,800/-
profits should not be included. Amount to be capitalized = and paid cash difference of 6,000/- for new machine with cash
1000 bags X 400 = 4,00,000/- price of 20,500/-.
(ii) Rental income should not have been deducted from cost since
Commercial Substance & fair value is given.
it was not an incidental operation necessary to bring PPE
The fair value of new machine is clearly evident in this case and
to present location & condition. It should be transferred to
hence, transaction to be recorder at 20,500.
P&L.
New Machine a/c ………. Dr. 20,500
Adjusted Cost = 25,00,000 (-) 5,00,000 (+) 4,00,000 (+) 25,000 =
P&L a/c ……………………..Dr. 2,300 (b.f.)
24,25,000/-
To Cash a/c 6,000
To Old Machine 16,800
Some Misc.
Topics

Machinery Component Subsequent Major


Spares Accounting Expenditure Inspection

Increases
• Recognize as PPE if it • If PPE has 2 or more future Whether major
significant components with economic or not?
satisfies the definition of
substantially different benefit?
PPE. useful lives/usage/flow of
• If not, then recognize as economic benefits, recognize
Inventory as per Ind AS 2. each component separately
• If recognized as PPE, • When a significant component
depreciate over useful life. is replaced:
• If principal PPE (i) Derecognize old
discarded/sold, net component’s carrying amt.
(ii) Capitalize cost of new
Capitalize with
YES NO Charge to
carrying amt. of spares PPE &
component depreciate over P&L
should be w/off in P&L. own useful life
Q1. ABC Ltd. acquired vehicle for 1,00,000/- with life of 10yrs. At the end
of 6th year, engine require replacement whereas remainder of vehicle is
perfect. Cost of new engine is 45,000/-. Discount rate = 5%. Discuss
accounting treatment.
Q3. A shipping co. is reqd. to bring all ships to dry dock every 5 yrs. for
A1. PV of engine = 45,000 X PVIF (5%, 6years) = 45,000 X 0.7462 = 33,580/- major overhaul. Such expenditure makes ship seaworthy & must be
Carrying amt. of machine at the end of 6th year = 100,000 – (100,000/10 X 6) = capitalized. A ship costing 20 million with 20yrs. life must have overhaul
1,00,000 – 60,000 = 40,000/- every 5yrs. Estimated overhaul costs at 5year point is 5 million. Actual cost
Carrying amt. of engine at the end of 6th year = 33,580 – (33,580/10 X 6) = at 6th year was 6 million. Explain accounting treatment.
33,580 – 20,148 = 13,432/-
Therefore, carrying amt. at the end of 6th year = 40,000 – 13,432 + 45,000 = A3. Ship a/c …………………………. Dr. 15
71,568/- Overhaul Component a/c ……….. Dr. 5
To Bank a/c 20
Q2. Which of the following expenditures should be capitalized & why? Carrying amt. of ship after 5yrs. = 15 – (15/20*5) = 15 – 3.75 = 11.25 million
Carrying amt. of overhaul component after 5yrs. = Nil
Expenditure Answer
11.25 million
th
At 6 year: Overhaul Component a/c ……….. Dr. 6
Routine Repairs No
To Bank a/c 6
Major Overhaul Exp. Yes Carrying amt. of ship after next 5yrs. = 11.25 – 3.75 = 7.5 million
Carrying amt. of overhaul component after 5yrs. = Nil
Replacement of roof tiles Yes 7.5 million
Substantial improvements to electrical wiring Yes
Q4. Jain Ltd. acquired building which had non-moving tenants.
system which will increase efficiency
Subsequently the co. paid 50lakhs compensation to the so that property
could be leased to 3rd party at much higher rate.
A4. Compensation paid to tenants enhances the value of building & increases
FEB, hence, satisfies recognition criteria. Hence, 50lakhs should be added to gross
book value of building.
Revaluation Model
Revaluation
 It is not mandatory Accounting
Land Book Value =
 Should be checked 100
regularly by a
professionally qualified
valuer.

 Should be performed First Time Subsequent


Revaluation Revaluation
for an entire class of
PPE

 Revalued Amt. <


Recoverable Amt. (Ind First Time
Upward Downward First Time Upward
AS 36) Revaluation Revaluation Revaluation
Downward
Revaluation
(to 120) (to 70) (to 120)
(to 70)

Subsequent Subsequent Subsequent Subsequent


PPE a/c … Dr. 20 P&L a/c … Dr. 30 Upward Downward Upward Downward
To RS a/c (OCI) 20 To PPE a/c 30 Revaluation Revaluation Revaluation Revaluation
(to 150) (to 90) (to 110) (to 60)

RS a/c … Dr. 20 PPE a/c … Dr. 40


PPE a/c … Dr. 30 P&L a/c … Dr. 10
P&L a/c … Dr. (b.f.) 10 To P&L a/c 30
To RS a/c (OCI) 30 To PPE a/c 10
To PPE a/c 30 To RS a/c (b.f.) 10
De-recognition (Disposal) of PPE

A ltd. sold some of its PPE for 100lakhs. WDV was 250lakhs.
If the entity followed These assets were revalued earlier and revaluation surplus of
200lakhs existed on date of sale.

Cash/Bank a/c Dr. 100


P&L a/c Dr. 150
To PPE a/c 250

COST Model REVALUATION Model Revaluation Surplus a/c Dr. 200


To General Reserve a/c 200

[Note: If entity is engaged in purchase/sale/lease of PPE in


ordinary course of business, then PPE should be reclassified as
Inventory & P/L on sale should be presented as Revenue from
T/f P/L on disposal to Operations.]
T/f P/L on disposal to P&L a/c
P&L a/c After disposal, if RS
[Other Income] exists – t/f to General
Reserve
Depreciation
 Systematic allocation of the depreciable amount over reflect T&F view and Prudence.
useful life.
 Entity can depreciate 2 assets of same class using different
 Depreciable amt. = cost/revalued amt. (-) est. residual value methods if they have different usage & nature.
 Useful life = expected period of use OR expected number
of unit’s production
Q1. A machine costing 120,000 is depreciated using SLM
 The residual value & useful life should be reviewed at each
over 10 yrs. With NIL residual value. At 3rd year end,
F.Y. end.
machine cost is increased by 6,000 & residual value
 Depreciation begins when asset available for use. reassessed as 9,000 with remaining life as 9yrs. Compute
depreciation for 4th year.
 Change in residual value/useful life/method of
depreciation = Change in accounting estimate = A1. Depreciation = (120,000 – NIL)/10 = 12,000 p.a.
Prospective Accounting (Ind AS 8)
WDV at 3rd year end = 120,000 – (12,000 X 3) = 84,000
 Method of depreciation should reflect the pattern in
Revised value of asset = 84,000 + 6,000 = 90,000
which the FEB of asset are expected to be consumed
by the entity i.e. in the ratio in which benefits are Revised depreciation = (90,000 – 9,000)/9 = 9,000 p.a.
consumed BUT not in the ratio of revenue. It should
Depreciation (continued…)
Q2. A building costing 12 lakhs is depreciated using SLM over 10 from machinery is absorbed in development activities. Hence, the amt. of
yrs. With 2 lakhs residual value. Entity adopted revaluation model depreciation should be included in the cost of Intangible Asset recognized
from 4th year. Building & residual value were revalued upward by 3 as per Ind AS 38(AS 26).
lakhs & 1 lakh. Remaining useful life reassessed at 10 years. Find
Q4. PQR ltd. Bought a machinery for 1,00,00/- on 01.04.14. It
depreciation of 4th year.
followed revaluation model & revalued asset @ 150,000/- on
A2. Depreciation= (12,00,000 – 2,00,000)/10= 1,00,000p.a. 31.03.16. it follows SLM depreciation. Out of depreciation of 18,750
(= 150,000 / 8) , it wants to charge 10,000 to P&L & t/f 8,750 to
WDV at 3rd year end= 12,00,000 – (1,00,000 X 3)= 9,00,000
reval. Surplus a/c. Can it do so?
Revised Value = 9,00,000 + 3,00,000 = 12,00,000/-
A4. As per Ind AS 16, an entity can optionally t/f difference between
Revised Residual Value = 2,00,000 + 1,00,000 = 3,00,000 depreciation on revalued amt. & depreciation on cost to surplus a/c.

Revised Depreciation= (12,00,000 – 3,00,000)/10= 90,000p.a. Depreciation a/c (P&L) Dr. 18,750
To PPE a/c 18,750
Q3. ABC lid. Is a pharma co involved in R&D. It acquired a (Being asset depreciated)
machine for 20lakhs for development activities with est. useful life
Revaluation Surplus a/c Dr. 8,750
of 10 yrs. The accountant depreciated asset on SLM & charged
depreciation to P&L. To Retained Earnings 8,750
A3. In the given case, PPE is used for development activities. The FEB (Accounting policy: amt. is transferred to revenue reserve)
Addition/extension to an existing asset
Est. useful life of machine is 6years. Machine is used with an
Addition/Extension attachment having useful life of 10yrs. Cost of machine =
60,000/- & cost of attachment = 6,000/-. Terminal value for
both is NIL. SLM depreciation is used.

(a) If attachment is not integral


Integral part of Depreciation = (60,000/6) +(6,000/10) = 10,600/-
existing asset? (b) If attachment is Integral
Depreciation = (60,000+6,000)/6 = 11,000/-

YES NO

Depreciate over Depreciate


remaining life of independently on
existing asset own useful life
Some Imp. questions….
Q. XYZ ltd. Purchased machine on 01.04.11. List price of machine =
80,00,000; Import Duty = 5,00,000; Delivery Fees = 1,00,000; Electrical
Installation Costs = 10,00,000; Pre-production testing = 4,00,000; 5yr Q. X Ltd. Started constructing building for own use on 01.04.10. Purchase
maintenance contract with vendor for 7,00,000. Price = 30,00,000/-; Stamp duty & legal fee = 2,00,000/-; Architect Fee =
2,00,000/-; Site preparation = 50,000/-; Materials = 10,00,000/-; labor cost
XYZ ltd. Was also granted trade discount @ 10% on list price. Settlement = 4,00,000/-; General ohd. = 1,00,000/-.
discount of 5% allowed if payment made within 1 month of purchase.
XYZ ltd. Paid on 20.04.11. Material costing 100,000/- has been spoiled & therefore, a further
150,000/- was spent for faulty design work. Consequently, work was
A. Particulars Amount stopped for 2 weeks during November, 2010 & it is estimated that 22,000/-
List Price 80,00,000 of labor cost relates to that period. Building was completed on 01.01.11 &
brought to use in 01.04.11. X ltd. Had taken loan of 40,00,000/- on 01.04.10
Less: Trade discount (8,00,000)
@ 8% p.a. repayable on 01.04.12.
72,00,000
A.
Import duty 5,00,000
Particulars Amount
Delivery Fees 1,00,000
Purchase price 30,00,000
Electrical Installation Costs 10,00,000
Stamp duty & legal fee 2,00,000
Pre-Production testing 4,00,000
Architect’s fee 2,00,000
Amount to be Capitalized 92,00,000
Site preparation cost 50,000
Material (10,00,000 – 2,50,000) 750,000
Maintenance contract is a separate service contract & should be recognized as
Labor cost (4,00,000 – 22,000) 378,000
Prepaid Expense & charges to P&L over 5yrs.
General overheads NIL
Settlement Discount of 360,000 (72,00,000 X 5%) should be recognized as Interest (40,00,000 X 8% X 9/12) 240,000
Other Income in P&L.
Amount to be Capitalized 48,18,000
Q. On 01.04.11, Sun Ltd. purchased land for 10 million (including legal A.
cost of 1 million) to construct new factory. Construction work
commenced on 01.05.11. Following costs were incurred:
Preparation & levelling of land – 300,000/-
Particulars Amount (‘000) Explanation
Purchase of materials for the construction – 60,80,000/-
Purchase of Land 10,000 Direct costs
Employment costs for construction workers – 200,000/- p.m. Preparation & levelling 300 Direct costs
Ohd. Costs incurred directly for construction – 100,000/- p.m. Materials 6080 Direct costs

Allocated ohd. Costs – 50,000/- p.m. Employment costs 1400 7-month period

Income recd. During temporary use of factory premises as a car park Direct ohd. Costs 700 7-month period
during construction period – 50,000/- Allocated overheads Nil Not a direct costs

Costs of relocating employees to work at new factory – 300,000/- Income from car park Nil Not related (P&L item)

Costs of opening ceremony on 31.01.11 – 150,000/- Relocation Costs Nil Not a direct cost
Opening ceremony Nil Not a direct cost
Factory was completed on 30.11.11 & production began on 01.02.12. Useful
life of factory was 40 yrs. from date of completion. It is estimated that Finance Costs 700 8-month period
roof will need to be replaced 20yrs. after date of completion & cost of
Temporary investment income (100) Directly related
replacement will be 30% of total cost of building.
Demolition costs 920 Obligation recognized
At 40 yr. end, Sun ltd. Has legally enforceable obligation to demolish
TOTAL 20,000
factory & restore site to its original condition. Est. cost of demolition is
20 million. Annual risk-adjusted discount rate is 8%. PV of Re.1 payable Particulars Amount (‘000) Explanation
in 40yrs. @ 8% is 4.6 cents.
Depreciable Amount 10,000 20,000 – 10,000
Construction of factory was partly financed by 17.5 million loan taken on Depreciation of roof (50) 10,000X30%X1/20X4/12
01.04.11 @ 6%. During 01.04.11 to 31.08.11, Sun ltd. Recd. Investment Depreciation of remainder (58) 10,000X70%X1/40X4/12
income of 100,000/- om temporary investment of the proceeds.
TOTAL 19,892