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INd As 16.pdf

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INd As 16.pdf

  1. 1. IND AS 16 Plant, Property and Equipment
  2. 2. What is an Asset ? • An asset is a resource • controlled by the entity • as a result of past events and • from which future economic benefits are expected to flow to the entity Direct Contribution to Revenue Saving In Cost
  3. 3. Scope of PPE PPE Includes Tangible Asset Held for Use Producing Goods or services Rental to others For administration Purpose Life>=12 Months Excludes Non current Asset held for sale ( IND AS 105) Exploratory and Evaluatory asset linked to mining ( IND AS 106) Biological asset for agriculture use (except bearer plants) ( IND AS 41)
  4. 4. Key Rule Before classification of an item into PPE, Investment or Inventory, the expenditure should satisfy the asset definition and condition to recognize the asset as per the framework. Once it is recognized as an asset, considering the intention of usage it is classified as PPE, Investment of inventory
  5. 5. Case - 1 A Public limited company whose main object as stated in its moa is to purchase, acquire, contract, develop, cultivate and sell agricultural and urban lands, buy large plots of virgin lands, develops and cultivate them and sells them in small plots. Land purchased by the company and the cost of development has been consistently grouped under fixed asset in its BS. Comment
  6. 6. Case – 1 - Solution As Per IND AS 16. PPE is a tangible asset which is held for producing goods, providing services, rental to others or administration purpose. The Main basis for classification is intention of usage of the asset rather than the nature of the entity. As per INDAS 2, Inventory is an asset which held for sale in the ordinary course of business etc In the given case, the entity is purchasing the land to develop and sell it in the ordinary course of business. The land does not satisfy the definition of a PPE as per IND AS 16. But it satisfies the definition of inventory as per INDAS 2. Hence classifying it as inventory and presenting under current asset would be correct. The Accounting treatment of company is not correct.
  7. 7. A. Initial Recognition (General Cases) Initial recognition (Cost) Purchased Asset Self constructed Asset Purchase Price xxx + Non Creditable Taxes xxx - Trade Discount (xxx) + Directly attributable expenses xxx + Present value of site restoration xxx Total Cost xxxx Material xxx + Labour xxx + Production Overhead xxx + Borrowing Cost (If it is QA) xxx + Present value of site restoration xxx Total Cost xxxx
  8. 8. Special Cases Deferred Payment Payment Terms >= 12 Months ( Beyond Normal Terms) Financing Transaction (hidden loan/ Interest) PPE Should be recorded at cash price. If cash price is not available, then PV of agreed payments. Payment Term < 12 Months (within Normal Terms) No Hidden Financing (It may involve a cash discount) PPE to be recorded at the agreed invoice price (cash discount – P&L) Barter Has Commercial Substance PPE to be recorded at fair value i.e. Fair Value of asset given up unless FV of asset is received is more reliable i) FV of Asset Given up ii) If (i) not available , FV of asset received iii) If (i) and (ii) not available , WDV of asset given up Lacks Commercial Substance PPE to be recorded at WDV of Assets given up If the Fair value of items given up and received are same, then we can take either . However, if the Fair value differ and no information is given on reliability , the following order of preference to be followed B. Initial Recognition (Special Cases)
  9. 9. Lack of Commercial Substance • A Transaction lacks commercial substance if the position of the company remains the same before and after a barter i.e. the nature of expenses and incomes are expected to remain similar pre and post barter. • If similar asset are exchanged, we can consider that the transaction lacks substance. If nothing is given, we will assume that a transaction has commercial substance.
  10. 10. Subsequent Expenditure Repair and maintenance ( day to day) and Minor Replacements Expensed to P&L Expenses increasing life or efficiency beyond originally assessed Capitalized Major replacement/ Inspection/ Overhaul WDV of Asset xxx + Cost of New part xxx - WDV of old Part * xxx Revised WDV xxxx Expenditure to Repair Damaged Asset Asset is Impaired at the time of damage Subsequent repair cost capitalized Asset not impaired at the time of damage Subsequent repair cost expensed to P & L Subsequent Expenditure
  11. 11. WDV of Old Part • The cost of the old part can be found through the below sources ( in order of Preference) • Breakup from the suppliers invoice • Fair value of the part at the time of purchase • If the above value are not available , the cost of the new part (time value adjusted)would be taken as the notional cost for the old part. The WDV of the old part can be calculated by deducting depreciation applicable.
  12. 12. Subsequent Valuation Valuation Model Cost Model Original Cost xxx - Acc Depreciation xxx WDV/ Carrying Value xxx Revaluation Model Fair Value (Determined at sufficient Interval) xxxx - Subsequent Depreciation xxx Carrying Value xxxx
  13. 13. Revaluation Model 1. Valuation Model should be selected separately for each class of PPE i.e. Asset having similar nature and end use would form part of single class. 2. Revaluation should be done at sufficient intervals i.e. Annually for assets with volatile values and every 3-5 years for asset with stable values 3. A change from cost to revaluation model or vice versa is treated as change in accounting policy and will be retrospective applied (IND AS 8 ) unless impracticable. Revaluation Model
  14. 14. Revaluation Initial Upward Revaluation Surplus (O.C.I) Initial Downward Profit and Loss A/c Subsequent Downward 1. Balance in Revaluation (O.C.I) 2. Excess (IF ANY) in P & L Subsequent Upward 1. P&L ( to the Extent of loss already debited) 2. Excess (IF ANY) in Revaluation Surplus (O.C.I)
  15. 15. Transfer of Revaluation Surplus The balance in the revaluation surplus ( non re classifiable OCI) may be written off to retained earnings in the ratio of depreciation. However , the transfer from revaluation surplus should be made directly to the retained earnings and should not be shown as income in the statement of profit and loss. At the time of sale, the remaining balance in revaluation surplus should be transferred to retained earnings.
  16. 16. Depreciation Depreciation Method [Based on Pattern of Economic Benefits Expected] SLM, WDV, Units of Production Etc. Estimates (to be reviewed annually) Useful Life Salvage Depreciation Method Component Method Asset has Major Component Component have separate Life Any change will be applied prospectively Depreciation of the component (Major Parts/ Inspection/ overhauls) 1. The Depreciation on each part should be based on useful life of the part. 2. However if the part exceed the life of the asset , then it would be appropriate to depreciate the part over the life of the part or the remaining life of asset whichever is shorter.
  17. 17. Changes in Provision for Site Restoration Changes in provision Cost Model Adjust the present value against the cost of PPE in the year of change Revaluation Model Adjust the present value of changes against the balance in revaluation surplus (if any) & excess if applicable to profit and loss in the year of change (alternative treatment of adjustment against cost is also possible)

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