IndAS 16

1. Property, Plant & Equipment
Rajesh Pathak
Indian Institute of Management, Raipur

2. Overview of Long-Lived Assets
• Property, Plant & Equipment or PPE (IndAS16)
• Long-lived assets - Resources that are held for an extended time, such as land,
buildings, equipment, natural resources, and patents
• These assets help produce revenues over many periods by facilitating the
production and sale of goods or services to customers.
• As per IndAS: 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. (Life >12 months)
• Exclusions: Non-Current assets held for sale (IndAS 105); exploratory assets linked to mining
(IndAS 106); biological assets related to agricultural activity except bearer plants (Cows for
Amul; bamboo or sugarcane are not PPE, covered under IndAS 41) etc.
An item of property, plant and equipment that qualifies for recognition as an asset shall
be measured initially at its Cost.

3. Initial Recognition Cost
• The Cost of an item of property, plant and equipment comprises:
• All costs involved in bringing the asset to the present location and condition necessary for it to
be capable of operating in the manner intended by management.
Cost Elements
Purchased Asset
Purchase Price ###
Import duties ###
Non-refundable taxes ###
Directly attributable costs ###
(transportation, installation, site
preparation, testing, insurance
on purchase etc., but no T&D,
inauguration exp. etc)
Discount/Rebates (###)
PV of site restoration* ###
(also referred as dismantling or
decommissioning, obligation due
to law or customary)
Total Cost $$$
Self Constructed Asset
Material ###
Labour ###
Production overheads ###
Borrowing costs ###
(if qualifying asset as per Ind
AS 23)
PV of site restoration ###
(Bearer plants treated like SCA)
Total Cost $$$
Usually a period of > 12 months considered to
be substantial
The amount of borrowing costs that an entity
capitalizes during a period shall not exceed the
amount of borrowing costs it incurred during
that construction period.
A qualifying asset is an asset that necessarily
takes a substantial period of time to get ready
for its intended use

4. Initial Recognition (Special Case) & Subsequent Expenditure
Cost Elements
Deferred Payment
Payment term > 12 M
• Financing Transaction
• Finance charges can’t be included as
cost of asset unless its qualifying
asset.
• Recording at Cash price
• If cash price not available, then PV
of agreed payments
Payment term < 12 M
• Recording at invoice price
• No hidden financing assumed
• If cash discount availed, taken to I/S
Barter (exchange of asset)
• It has commercial substance
PPE recorded at the FV of asset
given up
I. If (I) not available, FV of
asset acquired
II. Else, WDV of asset given
up
• It doesn’t has commercial
substance (Similar Asset or the
Co. remains more or less same
pre & post barter)
• PPE recorded at the WDV
of asset given up
Subsequent Expenditure
• Repairs & maintenance to be expensed
• Expenses improving capacity or life of
the asset to be capitalized
Major Replacement/Overhaul
• New BV: (WDV of asset + Cost of new
part - WDV of old part)
• WDV of old part can be ascertained as
follows:
• Break up from invoice
• If not, FV of the old part at the time
of new part purchase
• Else, cost of new part (time value
adjusted) considered notional cost of
new item and depreciated value
considered
Repairing damaged (Major) Asset
• Asset impaired at the time of damage
• Impairment loss (IndAS 36)
which reduces asset value
• Capitalize the repair cost
Repairing damaged (Minor) Asset
• Asset unimpaired at the time of
damage
• Expense the repair cost

5. Subsequent Valuation
Accounting Policy Choice
Based on class of PPEs (similar nature & use)
Valuation Models
Cost Model
Original cost ****
Less: Acc. Depr. ****
Carrying Value/WDV ****
Revaluation Prohibited
Revaluation Model
Fair Value (at sufficient interval) **
Subsequent-
Initial Downward Evaluation
• Loss in P&L
• Subsequent Upward
• P&L gain (extent of loss
booked earlier)
• Excess (if any OCI)
Initial Upward Evaluation
• Revaluation surplus (OCI)
• Subsequent downward
• Balance in OCI
• Excess (if any P&L loss)
Non-Reclassifiable OCI
Concept of Conservatism
• A change in the selected model possible considering a
changes in accounting policy (IndAS 8)
• Need to be done with retrospective effects
• Revaluation surplus is transferred to RE at the disposal.

6. Depreciation
Converting Assets into expenses
Matching concept
Methods
• Choice based on pattern of economic
benefits expected (e.g. L&B Vs. PC
Vs. Van)
• SLM, WDV, units of production
etc.
• Component Method
• Asset has major component
• Component has separate useful
life
• Eg. Building with components
(furnished; elevators)
• Not applicable to assets unless
the useful life of component
can’ be identified separately and
is different e.g. Car & Engine
of the car
• Can’t depreciate asset longer than its
life
Estimates
Estimation (requires annual review)
• Useful Life
• Salvage Value
• Depreciation Method
Any changes apply
prospectively.
Depreciation
Provision for Restoration
• Cost Model
• Unwinding as finance cost
• Change in estimation
prospective only and cost of
asset adjusted in PV terms
• Revaluation Model
• Unwinding as finance cost
• Change in estimation
prospective only and affected
through OCI
• Excess loss to go in P&L

7. Others
• The carrying amount of an item of property, plant and equipment shall
be derecognized:
• (a) on disposal; or
• (b) when no future economic benefits are expected from its use or disposal.
• The gain or loss arising from the derecognition of an item of property,
plant and equipment shall be included in profit or loss when the item is
derecognized
• Gains shall not be classified as Revenue.

8. Practice Exercise
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, buys large plots of virgin lands, develops and cultivates
them and sells them in small plots. Land purchased by the company and
the cost of development has been consistently grouped under PPE in its
BS. Comment.

9. Practice Exercise
On 1 April 2020, X Limited began the construction of a new factory. Costs relating to the factory, incurred in the
year ended 31 March 2021, are as follows:
Note 1: The factory was constructed in the eight months
ended 30 November 2020. It was brought into use on
31 December 2020. The employment costs are for the
nine months to 31 December 2020. The employees
were engaged in construction and related activities.
Note 2: Other costs directly related to the construction
include an abnormal cost of Rs. 200, in respect of
repairing the damage which resulted from a gas leak.
What will be the initial carrying value of the factory
building?

10. Practice Exercise
On 1-04-2020, Vishnu Limited installed a machine in the rented premises at a cost
of Rs. 25 lakh, whose life is 3 years. As per the rental agreement, the machine
should be decommissioned and the building should be brought into the original
position. The company should incur Rs. 4,00,000 at the end of the 3rd year to
restore the premises into the original position. Assume borrowing rate applicable to
the entity is 10%. Cost of Machine to be capitalized?
Present value decommissioning costs @ 10%, 3years (PVF = 0.751) = Rs. 4,00,000
× 0.751 = Rs. 3,00,400
Total cost of PPE to be capitalized = Rs. 25 lakh + Rs. 3,00,400 = Rs. 28,00,400.
When discounting is used, the carrying amount of a provision increases in each
period to reflect the passage of time. This increase is recognized as borrowing cost.

11. Practice Exercise
• BILDA S. A., a hypothetical company, borrows Rs. 1,000,000 at an interest rate of 10 percent per year on 1
January 2020 to finance the construction of a factory that will have a useful life of 40 years. Construction is
completed after two years, during which time the company earns Rs. 20,000 by temporarily investing the loan
proceeds.
• What is the amount of interest that will be capitalized under IndAS?
• Where will the capitalized borrowing cost appear on the company’s financial statements?
• The total amount of interest paid on the loan during construction is Rs. 200,000 ( =1,000,000 × 10% × 2
years).
• Under IndAS, the amount of borrowing cost eligible for capitalization is reduced by the Rs. 20,000 interest income from temporarily
investing the loan proceeds, so the amount to be capitalized is Rs. 180,000.
• The capitalized borrowing costs will appear on the company’s balance sheet as a component of property,
plant, and equipment. Accordingly, the interest paid will appear on the statement of cash flows as an
investment activity.

12. Practice Exercise
UPFIRST, a hypothetical manufacturing company, has elected to use the revaluation model for its machinery.
Assume for simplicity that the company owns a single machine, which it purchased for Rs.10,000 on the first
day of its fiscal period.
1. At the end of the first fiscal period after acquisition, assume the fair value of the machine is determined to be Rs.
11,000. How will the company’s financial statements reflect the asset?
2. At the end of the second fiscal period after acquisition, assume the fair value of the machine is determined to be Rs.
7,500. How will the company’s financial statements reflect the asset?
3. What if the order of the revaluation events are reversed?

13. Practice Exercise
• Assume a company trades in two automobiles, each of which originally cost
$20,000, of which $15,000 has been depreciated; thus, each has a net book value
of $5,000. Each has a fair value of $7,000 as a used car. The first automobile is
traded for another automobile with a invoice price of $30,000, and $18,000 cash is
given to the dealer in addition to the trade-in. In this case, the cost of the new
automobile is ? The second automobile is traded for a piece of equipment that also
has a invoice price of $30,000, and $18,000 cash is given in addition to the trade-
in. In this case, the cost of the new equipment is?

14. Practice Exercise
CUTITUP Co., a hypothetical company, purchases a milling machine, a type of machine used for shaping metal,
at a total cost of $10,000. $2,000 was estimated to represent the cost of the rotating cutter, a significant
component of the machine. The company expects the machine to have a useful life of eight years and a residual
value of $3,000 and that the rotating cutter will need to be replaced every two years. Assume the entire residual
value is attributable to the milling machine itself, and assume the company uses straight-line depreciation for all
assets.
1. How much depreciation expense would the company report in Year 1 if it uses the component method of
depreciation, and how much depreciation expense would the company report in Year 1 if it does not use the
component method?
2. Assuming a new cutter with an estimated two-year useful life is purchased at the end of Year 2 for $2,000,
what depreciation expenses would the company report in Year 3 if it uses the component method and if it does
not use the component method
3.Assuming replacement of the cutter every two years at a price of $2,000, what is the total depreciation expense
over the eight years if the company uses the component method compared with the total depreciation expense if
the company does not use the component method?

15. Practice Exercise
• During a moving operation of XYZ Ltd., a piece of equipment costing $10,000
was dropped and damaged. $3,220 was spent to repair it. Management believed,
however, that the salvage value of this equipment had been reduced by $660 from
the original estimate of $1,950 to $1,290. Up until that time, the equipment was
being depreciated at $805 per year, representing a 10 percent rate after deduction
of estimated salvage of $1,950. Accumulated depreciation was $3,220.
• Discuss the effects of drop in the salvage value.

16. Impairment: IndAS36
• An asset is impaired when its carrying amount exceeds its recoverable amount i.e. the asset’s fair
value less costs to sell. Mostly occurs due to unanticipated decline in the asset value.
• An entity shall assess at the end of each reporting period whether there is any indication that an
asset may be impaired. If any such indication exists, the entity shall estimate the recoverable
amount of the asset
• Irrespective of whether there is any indication (listed in standard) of impairment, an entity shall
also:
• test an intangible asset with an indefinite useful life
• test goodwill acquired in a business combination for impairment annually
• Fair value less costs to sell:
• The best evidence of an asset’s fair value less costs to sell is a price in a binding sale agreement in
an arm’s length transaction.
• If there is no binding sale agreement but an asset is traded in an active market, fair value less costs
to sell is the asset’s market price less the costs of disposal.
• If there is no binding sale agreement or active market for an asset, fair value less costs to sell is
based on the best information available to reflect the amount that an entity could obtain, at the end
of the reporting period, from the disposal of the asset in an arm’s length transaction between
knowledgeable, willing parties, after deducting the costs of disposal.

17. Recording & Effects of Impairment Loss
• If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying
amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment
loss.
• An impairment loss shall be recognized immediately in profit or loss, unless the asset is carried at
revalued amount. Any impairment loss of a revalued asset shall be treated as a revaluation
decrease. An impairment loss on a non-revalued asset is recognized in profit or loss.
• After the recognition of an impairment loss, the depreciation (amortization) charge for the asset
shall be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual
value (if any), on a systematic basis over its remaining useful life
• A reversal of an impairment loss for an asset other than goodwill shall be recognized immediately
in profit or loss, unless the asset is carried at revalued amount. Any reversal of an impairment loss
of a revalued asset shall be treated as a revaluation increase. The depreciation (amortization)
charge for the asset shall be adjusted in future periods

18. Intangible Assets: IndAS 38
• Internally generated goodwill, brands etc. shall not be recognized as an asset.
• To assess whether other internally generated intangible asset meets the criteria for
recognition, an entity classifies the generation of the asset into: a) research phase
b) development phase
• In the research phase of an internal project, an entity cannot demonstrate that an intangible asset exists
that will generate probable future economic benefits. Therefore, this expenditure is recognized as an
expense when it is incurred.
• An intangible asset arising from development (or from the development phase of an internal project)
shall be recognized if, and only if, an entity can demonstrate all of the following: (a) the technical
feasibility of completing the intangible asset so that it will be available for use or sale. (b) its intention to
complete the intangible asset and use or sell it. (c) its ability to use or sell the intangible asset d) the
availability of adequate technical, financial and other resources to complete the development and to use
or sell the intangible asset.

19. Thanks