Indian Accounting Standard 16, Property Plant and Equipment
The objective of Ind AS 16 is to prescribe the accounting treatment for property, plant and equipment so that users of the financial statements can discern information about an entity’s investment in its property, plant and equipment and the changes in such investment. 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.
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.
The cost of an item of property, plant and equipment shall be recognised 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.
Items such as spare parts, stand-by equipment and servicing equipment are recognised as property, plant or equipment if they meet the definition. Otherwise, such items are classified as inventory.
Measurement at recognition
An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its cost.
Examples of directly attributable costs are costs of site preparation; initial delivery and handling costs; installation and assembly costs, etc.
Examples of costs that are not costs of an item of property, plant and equipment are costs of opening a new facility; costs of conducting business in a new location or with a new class of customer (including costs of staff training); administration and other general overhead costs, etc.
Examples of costs that are not included in the carrying amount of an item of property, plant and equipment are costs incurred while an item capable of operating in the manner intended by management has yet to be brought into use or is operated at less than full capacity; initial operating losses, such as those incurred while demand for the item’s output builds up; and costs of relocating or reorganising part or all of an entity’s operations.
The income and related expenses of incidental operations are recognised in profit or loss.
PPE acquired in exchange for a non-monetary asset or assets or a combination of monetary and non-monetary assets
The cost of such an item of PPE is measured at fair value unless:
(a) the exchange transaction lacks commercial substance; or
(b) the fair value of neither the asset received nor the asset given up is reliably measurable.
The acquired item is measured in this manner even if an enterprise cannot immediately derecognise the asset given up. If the acquired item is not measured at fair value, its/their cost is measured at the carrying amount of the asset given up.
Measurement after recognition
An entity should choose either the cost model or the revaluation model as its accounting policy and shall apply that policy to an entire class of property, plant and equipment.
⇒ If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus.
However, the increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss.
⇒ If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss.
However, the decrease shall be recognised in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset. The decrease recognised in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus.
Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item should be depreciated separately. The depreciation charge for each period should be recognised in profit or loss unless it is included in the carrying amount of another asset. The depreciable amount of an asset should be allocated on a systematic basis over its useful life.
The residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if expectations differ from previous estimates, the change(s) should be accounted for as a change in an accounting estimate in accordance with Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors.
To determine whether an item of property, plant and equipment is impaired, an entity should apply Ind AS 36, Impairment of Assets.
The carrying amount of an item of property, plant and equipment should be derecognised:
a) on disposal; or
b) when no future economic benefits are expected from its use or disposal.
Appendix B to Ind AS 16 provides guidance for recognition of production stripping costs as an asset; initial measurement of the stripping activity asset; and subsequent measurement of the stripping activity asset. An entity shall recognise a stripping activity asset if, and only if, (a) it is probable that the future economic benefit (improved access to the ore body) associated with the stripping activity will flow to the entity; (b) the entity can identify the component of the ore body for which access has been improved; and (c) the costs relating to the stripping activity associated with that component can be measured reliably. The entity shall initially measure the stripping activity asset at cost. After initial recognition, the stripping activity asset shall be carried at either its cost or its revalued amount less depreciation or amortisation and less impairment losses, in the same way as the existing asset of which it is a part.