Property, Plant and Equipment (PPE)

05 Jan 2024

Property, Plant and Equipment (PPE) : Ind AS 16, AS 10

• PPE are tangible items,
• held for the production and supply of goods or services
• for rental to others,
• for administrative purposes
• Expected to be used during more than one period

Definitions:

Carrying Amount Amount at which an asset is recognized after deducting any accumulated depreciation and impairment losses.

Residual Value Estimated amount that an entity would currently obtain on disposal of asset after deducting estimated cost of disposal Residual value

Useful life Period over which asset is expected to be available for use by an entity, or Number of production or similar units expected to be obtained from an asset by an entity.

Depreciation Systematic allocation of depreciable amount of an asset over its useful life

Depreciable Amount Cost of an asset less its residual value.

Cost of PPE will be recognised as an asset if and only if:

1. It is probable that future economic benefits associated with the item will flow to the entity, AND
2. Cost of the item can be measured reliably

Measuring the cost of PPE

Cost of an item of PPE includes:

1. Purchase price including import duties and non-refundable taxes – after trade discounts and rebates
2. Costs directly attributable to bringing asset to the location and condition necessary for it to be capable of operating in the manner intended by the management.
3. Initial estimate of costs of dismantling/removing item and restoring – popularly known as the ‘Asset Retirement Obligation’ or ‘Provision for dismantling and restoring asset’ – to be measured in accordance with Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets.

Directly Attributable Costs:

• Employee benefit costs arising directly from the construction or acquisition of the item of PPE
• Cost of site preparation
• Initial delivery and handling costs
• Installation and assembly cost
• Cost of testing – to check if the asset is operating as intended Professional fees

Costs not to be included:

• Cost of opening new facility
• Cost of introducing a new product or service
• Cost of conducting a business in a new location or with a new class of customer
• Administration and General Overheads
• abnormal amounts of wasted material, labour and other resources

Subsequent Measurement: Measurement After Recognition An entity chooses either:

1. The cost model
2. The revaluation model

Carrying amount of PPE

• as per Cost Model = Cost of PPE at initial recognition - Accumulated Depreciation - Accumulated Impairment Losses
• as per Revaluation Model = Fair value at date of revaluation - Subsequent Accumulated Depreciation - Subsequent Accumulated Impairment Losses

Revaluation should be done every year, or as an when a fair value changes dramatically

Revaluation increase: PPE’s carrying amount is increased due to a revaluation. The increase shall be o recognized in other comprehensive income and o accumulated in equity under the heading of revaluation surplus.

Increase shall be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in P&L.

Revaluation Decrease: Decrease recognized in Statement of Profit and Loss if an asset’s carrying amount is decreased as a result of revaluation.

Depreciation Methods

1. Straight Line Method
2. Diminishing value Methof / Written Down Value Method–Decreasing charge over useful life

Derecognition

Carrying amount of an item of PPE should be derecognized: a. On disposal of the asset b. No future economic benefits expected from use or disposal of the asset

Gain/loss on derecognition = Carrying amount of item – Net proceeds from disposal (Proceeds from disposal as reduced by related costs)

Disclosures

The financial statements should disclose for each class of Property, plant and Equipment:

1. Measurement basis
2. Depreciation methods
3. Useful lives or depreciation rates
4. Gross carrying amount and accumulated depreciation at the beginning and end of the period
5. Comparative information required
6. Existence and amounts of restrictions on title to assets
7. PPE pledged as security for liabilities
8. Reconciliation of the carrying amount at the beginning and end of the period
9. Compensation from third parties
10. Amount of expenditures on account for PPE in the course of construction
11. Commitments for acquisition of PPE

If items of Property, Plant and Equipment are stated at revalued amount, following disclosures are required:

1. Date of revaluation
2. Whether an independent assessor or valuer was involved.
3. Methods and significant assumptions applied in estimating fair values
4. Carrying amount of each class of revalued PPE as if under the cost model
5. Revaluation surplus, including movement and any restrictions on distribution of balance to shareholders

Comparison of AS 10 and Ind AS 16

| Pertaining to | AS 10 | Ind AS 16 | |–|–|–| | Scope of the standard | 1. As per AS 10, items of property, plant and equipment retired from active use and held for disposal should be stated at the lower of their carrying amount and net realisable value. 2. Any write-down in this regard should be recognised immediately in the statement of profit and loss | Ind AS 16 does not deal with the assets ‘held for sale’ since the treatment of such assets is covered in Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations. |

Comparison of IFRS and Ind AS

There are no significant differences between IFRS and Ind AS.