3. The objective of Ind AS 16
• is to prescribe the accounting treatment for property,
plant and equipment so that users of the financial
statements
• information about an entity’s investment in its
property, plant and equipment and the changes in such
investment.
4. • The principal issues in accounting for property, plant and
equipment are the
• recognition of the assets, the determination of their
carrying amounts and the depreciation charges and
impairment losses to be recognised in relation to them.
5. Recognition
• The cost of any item of PPE must be recognized as an
asset only when:
• (a) It is apparent that the future economic benefits related
to such asset would flow to the business; and
• (b) Cost of such asset could be reliably measured
6. Definitions PPE (IND AS 16)
All tangible Items that are Held for the purpose of
Production or Supply of goods and services; or
for rental to others;
for other administrative purposes
Expected to be used during more than one period.
7.
8.
9. DEPRECIABLE AMOUNT (IND AS 16
Depreciable amount is the
cost of an asset
or
• other amount substituted for cost, less its residual value
The amount of depreciation should be allocated on an
orderly basis over the useful life of an asset.
The method of depreciation used should reflect an
asset’s pattern of future economic benefits
At each balance sheet date requires review of
(i) Residual value and the useful life of assets
(ii) Depreciation method employed
10. DEPRECIATION METHODS
The Depreciation Method used shall reflect the pattern in
which the Asset’s Future Economic Benefits are expected
to be consumed by the entity.
1. Diminishing Balance Method
2. Units of Production Method
3. Straight Line Method
11. Does not Apply to
• Property Plant & Equipment classified as held for sale
(IND AS 105)
• Biological Assets related to Agricultural activity (IND AS
41)
• Exploration and evaluation assets (IND AS 106)
• Mineral rights and mineral reserves
12. Directly
attributable
cost
Cost of
Employee
benefits
Cost of site
preparation
Installation
cost
Professional
fees
Other costs
Dismantaling
cost
Cost of
replacement
Major
inspection cost
Purchase cost
Purchase
price
Import duty
Other non
refundable tax
Deduct trade
discount
13. Constituents of cost
• The cost of the item of PPE includes:
• (a) The purchase price, which includes the import
duties and any non-refundable taxes on such
purchase, after deducting rebates and trade discounts
• (b) 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
• (c) Initial estimate of costs of removing and dismantling
an item and restoring a site where it is located
14. COST ELEMENT - EXCLUSION
• 1. Costs of operating a new facility
• 2. Costs of introducing a new product or
service or conducting business in a new
location
• 3. Administration and other general
overheads
• 4. Initial operating losses, such as at the
time when the demand builds up
• 5. Costs of relocating or reorganizing part.
15. Subsequent Cost In case of regular
Repair & Maintenance of PPE
• day-to-day servicing of item, cost shall be recognized in
Statement of Profit & Loss.
• some parts of asset may require replacement at regular
intervals.
• Also, items may be procured to make less frequently
recurring replacement.
• Cost of such replacing part may be recognized as asset
if recognition principle is met.
• Carrying amount of part that is replaced shall be de-
recognized.
• Cost of any major inspection is recognized in the
carrying amount of item of PPE as a replacement if
recognition criterion is satisfied.
16. Subsequent measurement of PPE
1. Cost Model;
2. Revaluation Model
The policy chosen shall apply to entire class of PPE.
1. Cost Model- PPE is carried at cost of asset acquired
less accumulated depreciation and accumulated
impairment losses.
2.Revaluation Model- PPE is carried at Fair Value at
date of revaluation less any subsequent
accumulated depreciation and accumulated impairment
loss.
19. Carrying Amount –
Amount at which an asset is recognized after
deducting any accumulated depreciation and
accumulated impairment losses
Cost-
Amount of cash or cash equivalents paid or the
fair value of the other consideration given to
acquire an asset at the time of its acquisition
or construction
Depreciation -
Systematic allocation of the depreciable
amount of an asset over its useful life
20. Residual value
Estimated amount that an entity would currently
obtain from disposal of the asset,
after deducting the estimated costs of disposal.
Useful life
a. Period over which an asset is expected to be
available for use by an entity
or
b. Number of production or similar units expected
to be obtained from the asset by an entity.
21. DISCLOSURE
• Ind AS 16 prescribes financial statements should
disclose, for every class of PPE:
(i) Measurement basis for determining carrying amount
(ii) Depreciation methods used
(iii) Depreciation rates/ Useful lives of the assets
(iv) Aggregate carrying amount and accrued depreciation at
the start and at the end of period
(v) Existence and value of restrictions on the title and PPE
pledged as collateral for liabilities
(vi) Amount of expenditure recognized in carrying amount of an
item of PPE during its construction
(vii) Amount with respect to contractual commitment for
acquisition of PPE
22. Particulars Ind AS 16 Property Plant
Equipment
Change in the
methods of
depreciation
considers such change as changes in the accounting
estimate and is applied prospectively.
Reviewing residual
value
reviewed at the end of every financial year at least and, any
change must be accounted for as changes in the accounting
estimate.
Reassessing the
useful life
at the end of every financial year and applied prospectively.
Government grant
received for PPE
doesn’t allow the same.
Cost of major
Inspections
recognized in carrying the amount of the PPE
23. Derecognition
• The carrying amount of items of PPE should
be derecognized:
• (a) At the time of their disposal; or
• (b) When there are no future economic benefits
anticipated from the use or disposal of such asset
• Any gain or loss arising from such derecognition
should be included in the P/L statement when
such item is derecognized.
• Gains arising from such derecognition shouldn’t
be classified as part of revenue.
24. EX 1-Entity A, a supermarket chain, is renovating one
of its major stores. The store will have more available
space for in store promotion outlets after the renovation
and will include a restaurant. Management is preparing
the budgets for the year after the store reopens, which
include the cost of remodelling and the expectation
of a 15% increase in sales resulting from the store
renovations, which will attract new customers. State
whether the remodeling cost will be capitalized or
not.
• ANS-The expenditure in remodelling the store will
create future economic benefits (in the form of 15%
of increase in sales) and the cost of remodelling can
be measured reliably, therefore, it should be
capitalised.
25. • EX 2 –
• Entity A exchanges surplus land with a book
value of ' 10,00,000 for cash of '20,00,000
and plant and machinery valued at '
25,00,000. What will be the measurement
cost of the assets received?
• Solution--Since the transaction has
commercial substance. The plant and
machinery would be recorded at ' 25,00,000,
which is equivalent to the fair value of the land
of' 45,00,000 less the cash received of'
20,00,00
26. • EX 3-Entity A exchanges car X with a book value
of'13,00,000 and a fair value of'13,25,000 for cash of
' 15,000 and car Y which has a fair value of '
13,10,000. The transaction lacks commercial
substance as the company's cash flows are not
expected to change as a result of the exchange. It
is in the same position as it was before the
transaction. What will be the measurement cost of
the assets received?
• Solution--The entity recognises the assets
received at the book value of car X. Therefore, it
recognises cash of' 15,000 and car Y as PPE with a
carrying value of' 12,85,000.
27. • EX. -Entity A has a policy of not providing for
depreciation on PPE capitalised in the year until the
following year, but provides for a full year's depreciation
in the year of disposal of an asset. Is this
acceptable?
• Solution -- Its is not acceptable because
• The depreciable amount of a tangible fixed asset should
be allocated on a systematic basis over its useful life.
The depreciation method should reflect the pattern in which
the asset's future economic benefits are expected to be
consumed by the entity.
• Useful life means the period over which the asset
is expected to be available for use by the entity.
Depreciation should commence as soon as the asset is
acquired and is available for use.
28. EX
• Entity A purchased an asset on 1st January 2013 for '
1,00,000 and the asset had an estimated useful life of
10 years and a residual value of nil.
• On 1st January 2017, the directors review the
estimated life and decide that the asset will probably be
useful for a further 4 years.
• Calculate the amount of depreciation for each year,
if company charges depreciation on Straight Line
basis.
29. Solution
• The entity has charged depreciation using the straight-line
method at ' 10,000 per annum i.e (1,00,000/10 years).
• On 1st January 2017, the asset's net book value is
[1,00,000 - (10,000 x 4)] ' 60,000.
• The remaining useful life is 4 years.
• The company should amend the annual provision for
depreciation to charge the unamortised cost over
the revised remaining life of four years.
• Consequently, it should charge depreciation for the next 4
years at ' 15,000 per annum i.e. (60,000/4 years).
• Note: Depreciation is recognised even if the Fair value
of the Asset exceeds its Carrying Amount. Repair
and maintenance of an asset do not negate the need to
depreciate it.
30. EXAMPLE
• A property costing Rs. 10,00,000 is bought in 2016. Its
estimated total physical life is 50 years. However, the
company considers it likely that it will sell the property
after 20 years.
• The estimated residual value after 20 years' time,
based on 2016 prices, is:
• Case (a) Rs.10,00,000
• Case (b) Rs.9,00,000.
• Calculate the amount of depreciation.
31. Solution
• Case (a)
• The company considers that the residual value, based on
prices prevailing at the balance sheet date, will equal the
cost.
• There is, therefore, no depreciable amount and
depreciation is correctly zero.
• Case (b)
• The company considers that the residual value, based on
prices prevailing at the balance sheet date, will be Rs.
9,00,000 and the depreciable amount is, therefore, Rs.
1,00,000.
• Annual depreciation (on a straight line basis) will be
Rs. 5,000 [{10,00,000 - 9,00,000} / 20].
32. EXAMPLE -In the year 2016-17, an entity has acquired a new
freehold building with a useful life of 50 years for Rs.70,00,000.
The entity desires to calculate the depreciation charge per
annum using a straight-line method. It has identified the
following components (with no residual value of lifts & fixtures
at the end of their useful life) as follows:
Calculate depreciation for the year 2016-17.
33. Component
Depreciation (Per annum)
(Rs.)
Land Nil
Roof 40,000
Lifts 25,000
Fixtures 50,000
Remainder of Building 60,000
1,75,000
ANSWER
Statement showing amount of depreciation as per
Componentisation Method
Note: When the roof requires replacement at the end of its
useful life the carrying amount will be nil. The cost of
replacing the roof should be recognised as a new
component.
34. An entity acquires an item of PPE for Rs. 50,000,
which is depreciated over 20 years. Three years
later, the asset is revalued to Rs.60,000. Compute
the amount of Revaluation Surplus?
Solution
Calculation of Revaluation surplus:
Working note:
Depreciation for first 3 years = (' 50,000/20 years) x 3
years = ' 7,500.
Revaluation Amount
Less: Carrying amount = Rs. 50,000 -Rs. 7,500 =
Revalue Surplus at the end of 3rdyear
60,000
42,500
17,500
37. QUIZZ
1. IND AS 16 Is for
a) Impairment loss
b) EPS
c) Property plant and equipment
d) Consolidation
2. Principal issues with ind as 16 is
a) recognition of the assets,
b) the determination of their carrying amounts
c) the depreciation charges
d) All of the above
38. 3. ……….is the cost of an asset less its residual value
a) Scrap value
b) EPS
c) Depreciable amount
d) None of the above
4. ………………… Amount at which an asset is recognized
after deducting any accumulated depreciation
a) Cost
b) Depreciation
c) Carrying amount
d) Residual value
39. 5. Amount of cash or cash equivalents paid or the fair value of the
other consideration given to acquire an asset at the time of its
acquisition
a) Cost
b) Depreciation
c) Carrying amount
d) Residual value
6. Systematic allocation of the depreciable amount of an asset
over its useful life
a) Cost
b) Depreciation
c) Carrying amount
d) Residual value
40. 7. Estimated amount that an entity would currently obtain from
disposal of the asset
a) Depreciation
b) Carrying amount
c) Residual value
d) Cost
8. Period over which an asset is expected to be available for use
by an entity
a) Depreciation
b) Carrying amount
c) Useful life
d) Cost
41. 9. The cost of any item of PPE must be recognized as an
asset only when:
a) future economic benefits related to such asset would
flow to the business
b) Cost of such asset could be reliably measured
c) Both a and b
d) None of the above
10. All tangible Items that are Held for the purpose of
Production or Supply of goods and services; or rental;
or administrative purposes for more than one period.is
a) Depreciation
b) PPE under Ind as 16
c) Residual value
d) Cost
42. 11. Depreciation models as per Ind as 16 is
a) Diminishing Balance Method
b) Units of Production Method
c) Straight Line Method
d) All of the above
12. day-to-day servicing of item, cost shall be recognized
a) Statement of Profit & Loss
b) Balance sheet – recognize as an assets
c) Revaluation account
d) None of the above
43. 13. Ind as 16 not apply to
a) Biological Assets related to Agricultural activity (IND AS
41)
b) Exploration and evaluation assets (IND AS 106)
c) Mineral rights and mineral reserves
d) All of the Above
14. cost of the item of PPE includes:
(a) The purchase price, which includes the import duties
(b) Costs which are directly attributable to bringing assets
to the condition
(c) Initial estimate of costs of removing and dismantling an
item
(d) All of the above
44. 15. When there are no future economic benefits anticipated
from the use or disposal of such asset so entity will perform
a) Cost
b) Depreciation
c) Derecognition of assets
d) Residual value
16.Disclosures as per Ind as 16 are
a) Measurement basis for determining carrying amount
b) Depreciation methods used
c) Depreciation rates, Useful lives of the assets
d) All of the above
45. 17. Subsequent measurement of PPE by
a) Cost model
b) Revaluation model
c) Both A and b
d) None of the above
18. Under which method PPE is carried at cost of asset
acquired less accumulated depreciation
a) Cost model
b) Revaluation model
c) Both A and b
d) None of the above
46. 19. Under which method PPE is carried at Fair Value at date of
revaluation less any subsequent accumulated depreciation
a) Cost model
b) Revaluation model
c) Both A and b
d) None of the above
• 20.Which is not part of cost of PPE
a) Administration and other general overheads
b) Initial operating losses, such as at the time when the
demand builds up
c) Costs of relocating or reorganizing part
d) All of the above
47. 21. carrying amount of items of PPE should be derecognized:
(a) At the time of their disposal; or
(b) When there are no future economic benefits use of asset
(c) When assets has life to use
(d) Both a and b
22. The Administration and other general overheads are included
in cost of PPE as per Ind as 16
a) Yes
b) no
48. 23. A property costing Rs. 1,00,000 is bought in 2016. Its
estimated total physical life is 5 years. residual value is
20000 calculate Depreciation
a) 20000
b) 16000
c) 25000
d) 15000
24. Entity A exchanges surplus land with a book value of '
1,00,000 for cash of '2,00,000 and plant and machinery valued
at ' 2,50,000. What will be the measurement cost of the assets
received?
a) 25000
b) 16000
c) 350000
d) 10000
49. 25. X ltd , a supermarket chain, is renovating one of its
major stores. The store will have more available space for
in store promotion outlets after the renovation and will
include a restaurant. Management is preparing the budgets
for the year after the store reopens, which include the cost
of remodelling and the expectation of a 15% increase in
sales resulting from the store renovations, which will attract
new customers. State whether the remodeling cost will be
capitalized .
a) Yes
b) no
26. IND AS 16 PPE provides for a full year's depreciation in
the year of disposal of an asset
a) Yes
b) no
50. MATCH THE FOLLOWING
A. IND AS 12 Business combination
B. IND AS 16 Impairment of assets
C. IND AS 33 Accounting for tax
D. IND AS 36 PPE
E. IND AS 103 EPS
51. Match
1. Ind as 16 objective A. PPE means
2. All tangible Items that are
Held for the purpose of
Production or Supply of
goods and services
b. accounting treatment for
PPE
3. Cost of asset – Scrape
value
c. Property Plant &
Equipment classified as held
for sale
4.Ind as 16 not apply d. Depreciable amount
