IAS 16
PROPERTY, PLANT &
EQUIPMENT (PPE)
CA. Anuradha Jain
Ex-Joint Director (Technical), ICAI
OBJECTIVE
To lay down accounting for PPE over its
life
 Initial recognition
 Subsequent measurement – carrying
amounts
 Depreciation & impairment
 Derecognition
2
SCOPE
IAS 16 to be applied to PPE except when
another standard requires or permits a
different accounting treatment e.g.
a)
PPE held for sale as per IFRS 5
b)
Biological assets related to agricultural
activity (IAS 41)
c)
Exploration & evaluation of mineral assets
(IFRS 6)
d)
Mineral rights & mineral reserves
Standard applies to PPE used to develop b)
c) & d)
3
SCOPE(CONTD.)
Other standards may require different
approaches to recognition of PPE,e.g.,
IAS 17, Leases, recognition based on
transfer of significant risks & rewards –
Other aspects e.g. depreciation as per
this standard
4
Definition

PPE
Tangible Items that


Are held for use in the production or supply of
goods or services, for rental to others, or for
administrative purposes; and
Are expected to be used during more than one
priod
5
RECOGNITION
Cost of PPE recognized as an asset if &
only if
 It is probable that future economic
benefits associated with them will flow
to the entity; and
 Cost can be measured reliably
6
RECOGNITION (CONTD.)
Spare Parts
Usually carried as inventory & recognized in
profit or loss when consumed
b)
Major spare parts qualify as PPE when
expected to be used during more than one
period
c)
Can be used only in connection with an item
of PPE, they are accounted for as PPE
Servicing Equipment - Same as a) and c)
above
Stand by Equipment – same as b) above 7
a)
INITIAL COSTS
PPE acquired for safety or
environmental reasons
Qualify for recognition or assets, because
future economic benefits of related
assets increase
8
SUBSEQUENT COSTS


Same principles as those for initial
recognition
Day-to-day servicing cost not
recognized in the carrying amount
(described as repairs & maintenance) –
recognized in profit or loss
9
PARTS OF PPE REQUIRING
REGULAR REPLACEMENT



E.g.furnace requiring relining after
specified period
Cost of replacing part of PPE is
recognized in the carrying amount of
PPE,if recognition criteria are met
Carrying amount of replaced part
derecognized as per the derecognition
provisions
10
REGULAR MAJOR INSPECTIONS
FOR FAULTS



-
-
E.g.Aircrafts
Cost recognized as replacement if recognition
criteria met
Remaining carrying amount of inspection
derecognized
Regardless of whether previous inspection
identified in the transaction when the item
was acquired/constructed
Estimated cost of future similar inspection as
an indication of inspection component when
item acquired/constructed
11
MEASUREMENT AT RECOGNITION
At cost which comprises
 Purchase price including import duties & nonrefundable purchase taxes after deducting
trade discounts & rebates
 Costs directly attributable to bring the asset
to the location & condition necessary for it to
be capable of operating in the manner
intended by the management
12
MEASUREMENT AT RECOGNITION
(CONTD.)


Initial estimate of costs of dismantling &
removing the item & restoring the site on
which located
(This requirement is not explicit in the
existing Standard)
13
MEASUREMENT AT
RECOGNITION (CONTD.)
Directly attributable costs
 Cost of employee benefits arising directly from the
costruction or acquisition of the item of PPE
 Costs of site preparation
 Initial delivery and handling costs
 Installation and assembly costs
 Cost of testing whether the asset is functioning
properly (net of sale proceeds of samples produced)
 Professional fees
14
MEASUREMENT AT RECOGNITION
(CONTD.)
Recognition of costs in the carrying
amount ceases when item is in the
location & condition intended by
management
Cost of using or deploying not included in
the carrying amount
15
MEASUREMENT AT RECOGNITION
(CONTD.)
Costs Not Included
a)
b)
c)
Costs incurred when capable of operating in
the manner intended by management – has
yet to be used or operated at less than full
capacity
Initial operating losses,e.g.,when demand
builds up
Costs of relocating or reorganizing part or
all of an entity’s operations
16
MEASUREMENT AT RECOGNITION
(CONTD.)
Costs Not Included


Operations during construction not incidental
to bringing the asset to location & condition
e.g. use of land as car park where land
acquired for constructing building –
income/expense recognized in P&L
IAS 23 Borrowing Costs for recognition of
interest of a self constructed item of PPE
17
Self constructed assets


Internal Profits to be eliminated
Cost of abnormal amounts of wasted
material, labour and other resources
incurred in self constructing an asset
not to be included in cost of the asset
18
MEASUREMENT OF COST


Cash price equivalent
Deferred payment terms beyond normal
credit period – interest expense/ capitalised
Exchange Transactions
Measured at FV unless
a)
Exchange transaction lacks commercial
substance or
b)
FV of neither the asset acquired or given up
can be measured reliably
In such cases cost measured at carrying amt of
19
asset given up
MEASUREMENT OF COST
(CONTD.)
If an entity is able to reliably
determine FV of either the asset
received or asset given up
FV of asset given up is used – unless the
FV of the asset received is more clearly
evident
20
MEASUREMENT OF COST
(CONTD.)
PPE held under finance lease by
lessee
Cost as per IAS 17
Govt.Grants
Cost reduced by grant (IAS 20)
(This treatment not available under IndAS 16)
(Alternative treatment – set up the grant as deferred
income)
21
MEASUREMENT AFTER
RECOGNITION
Choose either cost model or revaluation
model as accounting policy
Apply that policy to entire class

Cost Model
Cost less accumulated depreciation & any
accumulated impairment losses
22
MEASUREMENT AFTER
RECOGNITION (CONTD.)

Revaluation Model
PPE whose FV can be measured reliably,
measured at FV at revaluation date less
subsequent accumulated depreciation &
impairment losses
Revaluations at sufficient regularity – to ensure
that carrying amount does not differ
materially from that would be determined by
arriving at FV at each reporting period
23
MEASUREMENT AFTER
RECOGNITION (CONTD.)
FV of land & Buildings
market based evidence – appraisal by
professionally qualified valuers
Plant & Equipment
MV determined by appraisal
 No market based evidence of FV – specialized
PPE & item rarely sold except as part of
continuing business
Estimate FV using an income or depreciated
replacement cost approach
24
MEASUREMENT AFTER
RECOGNITION (CONTD.)
Frequency of revaluations
- depends upon – changes in FV of PPE
- PPE experiencing significant & volatile
changes in FV annual revaluation
- insignificant changes in FV – 3 to 5 yrs.
25
MEASUREMENT AFTER
RECOGNITION (CONTD.)
Treatment of accumulated depreciation on
revaluation
a) Restated proportionately with change in gross
carrying amount so that carrying amount after
revaluation equals revalued amount
Method used when revaluation by using index
to determine depreciated replacement cost
b) Eliminated against gross carrying amount – net
amount related to the revalued amount – often
used for buildings
26
MEASUREMENT AFTER
RECOGNITION (CONTD.)
Entire Classes to be revalued
Classes (examples)
 Land
 Land & Buildings
 Machinery
 Ships
 Aircrafts
 Motor Vehicles
 Furniture & fixtures
 Office equipment
27
MEASUREMENT AFTER
RECOGNITION (CONTD.)
Entire Class to be revalued
-
-
Selective revaluation within a class not
permitted
Class of assets may be revalued on
rolling basis within a short period
provided the revaluations are kept up to
date
28
MEASUREMENT AFTER
RECOGNITION (CONTD.)

-
-
Increase in asset’s carrying
amount
Recognized in other comprehensive
income & accumulated under
‘revaluation surplus`
Recognized in P or L to the extent it
reverses previous revaluation decrease
of the same asset
29
MEASUREMENT AFTER
RECOGNITION (CONTD.)

-
-
Decrease on revaluation
Recognized in P or L
In other comprehensive income to the extent
of any credit balance in revaluation surplus
Decrease recognized under other
comprehensive income reduces the amount
accumulated in equity under revaluation
surplus
30
MEASUREMENT AFTER
RECOGNITION (CONTD.)
Revaluation Surplus



Transfer directly to retained earnings when asset derecognized
Transferring the whole of surplus when asset is
retired or sold
Some surplus is transferred as the asset is used
Amt. of surplus transferred = Depreciation
based on revalued amt.- depreciation based on
original cost

Not through P or L
Effects of taxes on income because of revaluation
of PPE recognized & disclosed as per IAS 12
31
DEPRECIATION
Component Approach
Each part of an item of PPE with a cost
that is significant in relation to total cost
shall be depreciated separately
Allocation required – e.g.airframe &
engines in an aircraft
32
DEPRECIATION (CONTD.)
Significant parts having the same useful lives &
dep.methods for the same item are grouped
- Remainder of parts not significant
If varying expectations for those parts –
approximation techniques that faithfully
represent consumption pattern
- Entity may choose to dep. even insignificant
parts separately
- Dep.charge recognized in P or L unless
included in carrying amt.of another asset
33
DEPRECIATION (CONTD.)
Depreciable Amt.& Depreciable Period
Dep. Amount (arrived at after deducting
residual value) shall be allocated on a
systematic basis over useful life
Residual Value (RV) Estimated amt.that an
entity would currently obtain from disposal of
the asset after deducting costs of disposal
If the asset were already of the age & in the
condition expected at the end of the useful
life
34
DEPRECIATION (CONTD.)
Useful life (UL)
 Period over which asset expected to be
available for use; or
 No.of production or similar units
expected to be obtained from the asset
35
DEPRECIATION (CONTD.)
Residual Life & Useful Life
-
-
review at the least at the end of each
financial year
Any changes accounted for as change
in accounting estimate
RV is equal or more than dep.amt. –
dep.charge zero
36
DEPRECIATION (CONTD.)
Depr begins when asset available for use
 Depreciation on asset ceases at the earlier of
- date it is classified as held for sale (IFRS 5)
- the date the asset is de-recognized
 Depreciation does not cease when
- asset becomes idle or
- retired from active use
- unless the asset is fully dep.
 However,under usage method (UoP) –
Dep.can be zero when there is no production

37
DEPRECIATION (CONTD.)
Land & Buildings – separable assets
and are accounted for separately even
when acquired together
Land generally not depreciated unless it
has limited life
38
Depreciation Method
- shall reflect the pattern in which the
asset’s future economic benefits are
expected to be consumed
- Permitted Methods – SLM, WDV, UoP
- Each component to be depreciated
separately if its cost is significant in
relation to the total of that asset
39
DEPRECIATION (CONTD.)
Depreciation Method
- Review at least each financial year end
- Revise method if significant change in
the pattern of consumption of future
economic benefits
- Change in accounting estimate as per
IAS 8 – Prospective change
40
DEPRECIATION (CONTD.)
Impairment
Apply IAS 36
Compensation for Impairment
From third parties include in Profit or Loss
when compensation becomes receivable
41
DE-RECOGNITION
a)
b)
-
-
On disposal (sale,donation,given on finance
lease, or
When no future economic benefits expected
from use or disposal
Gain or loss on de-recognition – include in
profit or loss (Net disposal proceeds –
carrying amount)
Gains not classified as revenue
42
DE-RECOGNITION (CONTD.)
Items of PPE routinely sold that are
held for rental to others
-
-
-
Transfer to inventories at their carrying
amount when they cease to be rented
& become held for sale
Proceeds recognized as revenue
IFRS 5 does not apply to such assets
43
DISCLOSURES
Para 73 to 79 of IAS 16
44
Main differences with Indian GAAP
Cost of PPE
Similar to IFRS in Indian GAAP
except
- Under IFRS, if payment deferred beyond normal

credit limits, borrowing cost to be expensed/
capitalised as per IAS 23. No such explicit
requirement under Indian GAAP.
- no general guidance in Indian GAAP for capitalization
of dismantling & site restoration cost
45
Main differences with
Indian GAAP

-
-
-
Subsequent cost
Subsequent routine maintenance exp is expensed off in both
the GAAPs
Under IFRS,replacement of parts ,cost of a major inspection &
overhaul occurring at regular intervals is capitalized when
recognition criteria met-Indian GAAP permits capitalization only
when exp increases future benefits from existing asset beyond
its previously assessed standard of performance
Under IFRS, carrying amount of replaced part needs to be
decapitalised even if the replaced part had not been
depreciated separately-no such requirement in Indian GAAP
46
Main differences with
Indian GAAP

-
-
-
Revaluation
Under IFRS
Depreciation on revaluation can not be recouped
from revaluation reserve- allowed in Indian GAAP
Transfers from revaluation reserve to retained
earnings made directly & not through P& L A/cpermitted through P&L in Indian GAAP
Revaluation to be kept sufficiently up to date to
ensure that carrying amount does not differ
materially from fair value-no such requirement in
Indian GAAP for regular revaluations
47
Main differences with
Indian GAAP

-
-
Component accounting
Significant emphasis on separate accounting &
depreciation of components of fixed assets under
IFRS
No such requirement in Indian GAAP
48
Main differences with
Indian GAAP

•
•
Depreciation
No minimum rates of depreciation under IFRS unlike
Schedule XIV of Companies Act, 1956
Change in method of depreciation
-IFRS
Change in accounting estimate
Applied prospectively
-Indian GAAP
Change in accounting policy
Applied retrospectively
49
Main differences with
Indian GAAP

•
Depreciation
IFRS requires annual review of
-depreciation method
-useful life
-residual value
Currently no such requirement in Indian GAAP
50
THANK YOU !!
51