IAS 16 Property, Plant and Equipment

The Standard Applicable to : All NON-CURRENT* Assets. Except : (a) PPE sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations;

(b) Biological assets related to agricultural activity (c) (d) the recognition and measurement of exploration and evaluation assets; or mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources. However, this Standard applies to property, plant and equipment used to develop or maintain the assets described in (b)(d).
* Non-Current Asset Assets used for production / supply of goods or services or administrative purpose called noncurrent asset.

Major Aspects : i. ii. Recognition of Assets Determination of cost & its measurements - a. Measurement at recognition - b. Measurement after recognition iii. Depreciation Charges - a. Depreciation Amount and period - b. Depreciation Method iv. v. Impairment losses De-recognition

Recognition of assets : Cost of an item of PPE shall be recognized as an asset if, and only if : (a) it is probable that future economic benefits associated with the item will flow to the entity; and (b) the cost of the item can be measured reliably. Assets which is not generating directly future economic benefits like safety and environment protection equipment qualifies as PPE. Reason : Without them the entity is unable to manufacture or sale. It enable future economic benefits Major spare parts and stand-by equipment qualify as PPE if - Use is expected over 1 period - they can be used only in connection with an item of PPE

Determination of costs and its measurements : (a) At Recognition Initial Cost that are incurred to acquire / construct : - Purchase price (duties + non-refundable taxes trade discount - rebate) - Cost directly attributable to brining the asset to the location and conditions Directly attributable cost examples : cost of employee benefits arising directly from construction/acquisition, cost of site preparation, initial delivery and handing cost, installation & assembly cost, cost of testing etc BUT, does not include : Cost not directly attributable - opening of a new facility, - introduction of new product (advertisement) - cost like staff training or business in new area - administration & other general overheads
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Special Provisions : Determination of cost : (i) Incidental operations - Incidental income and exp. May not necessary to bring the item to the location. All these part of P&L. (Eg. Building site used as storage or parking so income to P&L) Construction of assets : Asset is constructed and used, the cost would be same as if it is acquired. (Any internal profit eliminated) (Eg. Cement manuf, used cement for own building or lift manuf. Used one lift of his own building)

(ii)

(iii) Abnormal wastage etc not part of cost of asset (iv) Exchange with other PPE : Fair value unless either of exchanged PPEs lacks commercial value.

(b)

After initial recognition

- Subsequent cost incurred as replacement of some parts at regular intervals. (Example Seat inside aircraft, Inspection of Govt.etc Vehicle Fitness Certificate, FDI drug manuf.)

Measurement after initial recognition of cost :SUBSEQUENT Yrs Either choose : COST MODEL or REVALUATION Model - COST MODEL : Cost (-) Accumulated Depr(-) Impairment any - REVALUATION MODEL : FAIR VALUE on the date of revaluation (-) accumulated depr (-) impairment any If opted revaluation model : - Revaluation after regular basis, frequency depends on NATURE OF ITEM (Volatile every year, others once in 3 or 5 years)

Additional Point at the time of revaluation (i) LAND & Building : Should have market based evidence. Appraisal done by professionally qualified valuer. (ii) Plant : By appraisal by valuer (iii) If specialized nature of PPE, market base evidence not available : i. Estimate fair value using an income or a Depreciated replacement cost approached. (iv) Revaluation for all assets in a class of assets
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Treatment of accumulated depreciation when revalued :

Restated* proportionately : so that carrying amount of the asset after revaluation equal its revaluated amount. (Used where index to determine its depreciated replacement cost) Eliminated** : against gross carrying amount of asset and the net amount restated to the revalued amount. (generally used for building) Amount of adjustment arising on account of above forms part of the increase or decrease in carrying amount treated separately
Asset WDV at Rs. 150, Accumulated depreciation Rs. 30 and Fair Value Rs. 180 Particulars Cost Or Valuation before revaluation (a) * Restated Proportionately 150 75 225 ** Eliminated 150 30 180

Revaluation Adjustment (balancing) (b) After Revaluation Depreciation : Before Revaluation Revaluation Adjustment (balancing) After Revaluation Revalued Amount (d) (e) (f) (g) (c)

30 15 45 180

30 -30 0 180

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At the time of revaluation : carrying amount may : If Increase - Other comprehensive income & accumulated in equity under hading revaluation surplus. - However, Increase shall be recognized in P&L to the extend that is reverses a revaluation decrease of the same asset previously recognized in P &L. If Decrease : - Recognized in P &L. - However, decrease shall be recognized in other comprehensive income to the extend of any credit balance existing in the revaluation surplus in respect of that asset.
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At the time of de-recognition : De-recognition will be Due to sale, retirement etc (i) Amount standing in the credit or revaluation reserve for this PPE may be transferred directly to RETAINED EARNINGS. When asset in use : difference between the depr based on revalued amount and the original amount shall be transferred from the revaluation surplus to P & L account.

(ii)

(iii) Transfer from revaluation surplus to retained earnings are not made through P & L.

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DEPRECIATION : Depreciation amount & PERIOD : DEPR : From date WHEN IT IS AVAIALBLE for use Allocated on a systematic basis over its useful life Useful life depends on expected usage of asset, physical wear & tear, tech obsolescence & legal limitation. Economic life may differ from useful life (vehicle 5 year use then sold out) Residual value is deducted from cost of asset before depr. Depr recognized even if fair value is higher than carrying amount, provided residual value is not higher than the carrying amount. Depr of an asset ceases earlier of the following dates : a) Classified as held for sale or transfer to disposal group b) itself is derecognized

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(c) Cessation of recognition of cost of PPE :

When PPE is in the location and are capable of operations, recognition of cost of carrying ceases.
Following cost not included in the carrying amount : (i) Cost incurred while it is operated at less than full capacity or not used in the manner intended by management. (ii) Initial operating losses (iii) Cost of relocating or reorganizing part or all of an entitys operations.
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Depreciation Method : Reflect the pattern in which assets future economic benefit are expected to be consumed by the entity. Variety of Method. Method Shall be reviewed once a year and if there is any change then method can be changed. Some of methods : SLM, Diminishing balance method, USE OF PRODUCTION based on production Impairment losses : Certain occasions: Fire, land-given to Govt. Etc. Compensation if any P&L.

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De-recognition of Asset : when : (a) On disposal (b) when no future benefit are expected from its use or disposal. (Disposal sale, finance lease, donation) Gain or Loss arising from de-recognition of an item of PPE shall be included in P&L. Gain or loss shall be determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item.
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DISCLOSURES : Each class of PPE : Basis of measurement adopted, Method of derp, Useful lives/depr. rate used, gross carrying amount, accumulated depr at the beginning and end. Statement of reconciliation of carrying amount : At beginning and end

Disclose : Additions, asset classified as held for sale, acquisition of assets, increase / decrease in carrying cost resulting from revaluation and impairment recognized or reversed, impairment loss recognized in P&L, depreciation, NET EXCHANGE DIFFERENCE due change in reporting currency, any other changes. Amount of restrictions on title, and PPE pledged as security for liabilities, amount of expenditure recognized in carrying amount of an item of PPE in the course of its construction, contractual commitments for the acquisition of PPE, if not disclosed separately Disclose : nature and effect of change in accounting estimate : change in estimates : residual value, estimated cost of dismantling, removing or restoring items of PPE, useful life, depr method. PPE : if at revalued amount : - effective date of revaluation, whether an independent valuer involved, method & significant assumptions applied in estimating the items fair values, User of FS may also find following information relevant to their needs: carrying amount of temporarily idle PPE, gross carrying amount of any fully depreciated PPE that is still in use, carrying amount of asset retired but not classified as held for sale, cost model used fair value when it is materially different.

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Definitions:

Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation and accumulated impairment losses. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arms length transaction. An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. 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.

Recoverable amount is the higher of an assets fair value less costs to sell and its value in use. The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. Useful life is: (a) the period over which an asset is expected to be available for use by an entity; or (b) the number of production or similar units expected to be obtained from the asset by an entity.
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