Objective of Ind AS 16 Property, Plant and Equipment Accounting Standards

The objective of this Standard is for prescribing the accounting treatment for Property, Plant, and Equipment (P, P&E) so that the user of the financial statements can be discerned about the information an entity’s investment in its Property, Plant and Equipment (P, P&E) and for the various changes in such investment.

The main problems in accounting for Property, Plant, and Equipment (p, P&E) recognize the assets, determining their carrying values, and the charges of depreciation and losses, which are impaired for being in honor concerning them.

SCOPE of  Ind AS 16 Property, Plant and Equipment Accounting Standards

This Standard can be applied in accounting for Property, Plant, and Equipment (P, P&E) except when another Standard is required to be permitted as a different treatment for accounting.

However, this Standard should be applied to Property, Plant, and Equipment (P, P&E) used for the development or maintenance of the assets described.

Accounting of an entity for investment in a property following Ind AS 40, Investment in Property, should be used for the cost model in this Standard for owning an investment property.

RELEVANT DEFINITIONS Ind AS 16 Property, Plant and Equipment Accounting Standards

The following points are the main terms that are used in this standard:

Property, Plant, and Equipment (P, P&E) tangible items that:

a) These are kept on hold for use in the production or supply of goods or services, for rental purposes for others, or various administration purposes.

b) These have been expected to be used during more than one period.

A bearer’s plant is a living plant that:

(a) Is used for the production or supplying of agricultural produce.

(b) Is expected for bearing products for more than one period.

(c) Having a remote likelihood for being sold as agricultural produce, except for various incidental scrap sales.

Conveying value is the value at which an asset can be recognized after deducting any accumulated depreciation and losses of accumulated impairment.

Cost is the value of cash or cash equivalents paid or the fair value of the other consideration that can be given for acquiring an asset at the time of its acquisition or construction or, where it is applicable, for the amount which is attributed to that asset when it is initially recognized following the particular requirements of other Indian Accounting Standards, e.g., Ind AS 102 on Share-based Payment.

The amount which can be depreciated is the cost of an asset or other amount which can be substituted for cost; residual value is considered lesser.

Systematic allocation is the depreciation that can be the depreciable amount of an asset over its life.

Entity-specific value can be the present value of the cash flows that an entity expects, which can arise from the continuous use of an asset and its disposal at the end of its expectation for incurring or useful life while settling a liability.

Fair value is the price that can be received for selling an asset or can be paid for the transfer of a liability in an orderly manner of the transaction between market participants at the date of measurement.

An impairment loss is an amount by which the carrying amount of an asset can exceed its amount, which is recoverable.

Amounts that can be recovered are the amount that can be higher than an asset’s fair value and less than the costs for selling and its value in use.

The estimated amount is the residual value of assets that an entity will be currently obtaining from the disposal of the investment, after the deduction of the estimated costs of removal, if the acquisition were already of the duration and in the condition it could be expected at the end of its useful life.

Useful life can be Ind AS 16 Property, Plant and Equipment Accounting Standards

a) The period over which an asset can be expected to be available for an entity’s use.

b) The similar units or number of products can be expected to be obtained from an entity’s asset.

RECOGNITION Property, Plant and Equipment Accounting Standards

Criteria of General recognition:

The price of an item of Property, Plant, and Equipment (P, P&E) should be recognized as an asset only if:

a) If it is probable that the economic benefits of the future can be associated with the item will flow to the entity.

b) The price of the item can be reliably measured.

Recognition of Spare parts, stand-by equipment, and servicing equipment:

Items such as servicing equipment, spare parts, and standby pieces of equipment can be recognized following this Ind AS while meeting the definition of Property, Plant, and Equipment (P, P&E). Otherwise, such items can be classified as an inventory.

Unit of measurement for recognizing the Property, Plant, and Equipment (P, P&E) and Aggregation of individually insignificant items:

This Standard doesn’t prescribe the unit for measuring the recognition, i.e., what can be constituted by an item of property, plant, and equipment. Thus, under specific circumstances of an entity’s judgment can be required if applying the recognition criteria. It might be appropriate to aggregate individually insignificant items, such as molds, tools, and dies, and apply the criteria to the aggregate value.

Initial Cost: Property, Plant and Equipment Accounting Standards

Things of property, plant, and equipment may be acquired for safety or environmental reasons. Although cannot be directly increasing the benefits of future economics of any particular existing thing of property, plant, and equipment, the purchase of such property, plant, and equipment which may be necessary for an entity for obtaining the future economic benefits from its other assets.

Such things of property, plant, and equipment can be qualified for recognition as assets because they can be enabled as an entity to derive future economic benefits from related acquisitions over which could be derived that is having those items which are not been acquired.

For example, A chemical manufacturer may be installing new chemical handling processes for complying with environmental requirements for the production. The  storage of various dangerous chemicals which are related plant enhancements are recognized as an assets.

Thus entity is unable to manufacture and sell chemicals without them. However, the result of carrying amount of such an asset and also related to those assets which are reviewed for impairment following Ind AS 36 Impairment of Assets.

Subsequent costs:

Repair and maintenance-

An entity doesn’t recognize in the carrying amount of an item of property, plant, and equipment the costs of the day to day servicing of the thing. Instead, these costs are recognized in profit or loss as incurred. Costs of daily servicing are primarily the costs of labor and consumables and may include the cost of small parts.

Replacement of parts of a property, plant, and equipment-

Parts of few items of property, plant, and equipment may be required for the replacement at regular intervals. For example, a furnace may be required reclining after a specific number of hours of usage, or interiors of an aircraft such as seats and galleys may be requiring several times replacement during the life of the airframe.

Items of PPE (property, plant and equipments) may be acquiring to make a less frequently recurring replacement, such as replacing the interior walls or creating a non-recurring replacement.

Under the recognition principle, an entity who can be recognized in the carrying amount of a thing of property, plant, and equipment the cost of replacing part of such an item when that cost can be incurred if the recognition criteria can be met. The carrying amount of those parts can be replaced and can be derecognized following the de-recognition provisions of this Standard.

Major inspections or overhauls-

A condition of continuation of operation of an item of property, plant, and equipment (for e.g., an aircraft) may be performed by regular major inspections for faults regardless of whether parts of the article are replaced.

When each primary inspection have been performed, its cost can be recognized in the amount of carrying item of property, plant, and equipment as a replacement if the recognition criteria can be satisfied.

Any carrying amount which is remained of the cost of the previous inspection is derecognized. It occurs regardless of whether the cost of the last review can be identified in the transaction in which the item have been acquired or even constructed.

If it is necessary, then the estimated cost of a future similar inspection may be used to indicate what the cost of the existing inspection component was when the item was acquired or constructed.

MEASUREMENT RECOGNITION

Measurement at a cost:

A thing of property, plant, and equipment that can be qualified for recognition as an asset should be initially measured at its cost.

Element of cost:

Cost of an acquired cost-

Component cost=

The value of a thing of property, plant, and equipment comprises:

After deducting trade discounts and rebates,

a) Its purchase price includes import duties and non-refundable purchase taxes.

b) Any costs that can be directly attributated for bringing the asset to the location and necessary conditions for it to operate in the manner which are intended by the management.

c) The initial estimation of the costs of dismantled and removing the item and restoration of the site on which it can be located, the obligation for which an entity can incur either when the item can be acquired or as a consequences of having used the thing during a particular period for various purposes other than for the production of inventories during that period.

Cost of self-constructed asset and Bearer Plants-

The price of a self-constructed asset can be determined by using the same principles as for an asset which can be acquired. If an entity is making similar assets for sale in the ordinary course of business, the asset’s cost is usually the same as constructing sale support. Therefore, any internal profits can be eliminated in arriving at such prices.

Similarly, the value of abnormal amounts of wasted material, labor, or other resources incurred in self-constructing an asset is not included in the asset’s price.

According to Ind AS 23 Borrowing Costs establishes criteria for recognizing interest as a kind of component of the carrying amount of a self-construction of an item of property, plant, and equipment.

Bearer plants can be accounted for in the same way as self-construction of an items of property, plant, and equipment before they can be in the location and condition necessary for operating in the manner which is intended by management.

Consequently, references for ‘construction’ in this Standard should be read as covering activities required for cultivating the bearer plants before they can be in the necessary location and condition to operate in the manner intended by management.

Cost of dismantling, removal, and site restoration-

The cost incurred by an entity regarding obligation for dismantling, removing, and restoring the site in which a thing of property, plant and equipment is located is recognized and measured according to Ind AS 37, Contingent Assets, contingent liabilities and provisions.

Suppose the obligations can be incurred when the asset have been acquired or during a period when the item have been used other than to produce inventories. In that case, they are included in the cost of the item property, plant, and equipment.

An entity can apply Ind AS 2, Inventories, for the costs of obligations for removing, dismantling and restoring the place on which an item is located during a particular period due to having used the article to produce inventories during that period.

Incidental operations-

Some operations can be occurred in connection with the development or construction of an item of PPE but it is not even necessary for bring the item to the location and condition which are required for it and to be capable of operating in the manner which are intended by management.

These incidental operations might be occurring before or during the activities of construction or development. For example, income can be earned through using a building site as a car park until construction starts.

Because operations which are incidental aren’t necessary for bringing any item to the location and condition required for it that can be capable for operating in the manner which can be intended by the management, the income and several related expenses of incidental operations can be recognized in profit or loss and can be included in their respective classifications of income and expenditure.

Cessation of capitalization-

Recognition of expense in the carrying value of an item of property, plant, and equipment ceases when the thing in this location and condition can be necessary for it and be capable of operating in the manner which is intended by management. Therefore, costs can be incurred by the usage or redeploying of an item which are not included in the item’s carrying amount.

For example, the following costs aren’t included in the carrying value of an item of property, plant, and equipment:

a) Costs which are incurred while an item that is capable of operating in the manner which are intended by management has yet to be brought into use or is performed at less than total capacity.

b) Initial operating losses, such as those losses that are incurred while demand for the item’s output builds up.

c) Costs of relocation or reorganizing part or all of an entity’s operations.

Measurement of cost Property, Plant and Equipment Accounting Standards

Payment deferred beyond average credit terms

The expense of an item of property, plant, and equipment is the cash price equivalent to the recognition date. Suppose payment is deferred beyond regular credit terms. In that case, the difference between the cash price equivalent and the total payment is recognized as interest throughout credit unless such a claim is capitalized following Ind AS 23.

Measurement of PPE acquired in Exchange=.

One or more property items, plants, and equipment can be acquired in exchange for an asset which is non-monetary aor assets or a combination of monetary and non-monetary assets. The expense of such an item of property, plant, and equipment can be measured at fair value (even if an entity cannot immediately derecognize the asset given up) unless:

a) The exchange transaction lacks commercial substance.

b) The fair value of neither the received asset nor the asset which is given up can be reliably measurable.

If the item which is acquired is not measured at fair value, its cost is calculated at the carrying amount of the asset can be given up.

An entity who determines whether an exchange transaction have to be  commercial substance which can be considered by the extent for which its future cash flows are expected to change due to the transaction. An exchange transaction has commercial significance if:

a) The configuration like risk, timing, and amount of the cash flows of the asset received differs from the composition of the cash flows of the investment transferred.

b) The entity-specific amount of the portion of the entity’s operations affected by the transaction changes resulting from the exchange.

c) The difference in point (a) or (b) is significant relative to the fair value of the assets exchanged.

To determine whether an exchange transaction has commercial substance, the entity-specific value of the portion of the entity’s operations affected by the trade shall reflect post-tax cash flows.

An asset’s fair value can be reliably measurable if:

a) The variability is in the range of reasonable, fair value measurements that is not significant for that asset.

b) The probabilities of the various can be estimated within the range can be reasonably assessed and used when measuring fair value.

Suppose an entity can reliably measure the fair value of either the asset received, or the acquisition has given up. In this matter, the fair value of the support given up is used to measure the cost of the investment received unless the fair value of the asset acquired is more clearly evident.

The amount of carrying of an item of property, plant, and equipment may be reduced by Government grants following Ind AS 20, Accounting for Government Grants and Disclosure of Government Assistance.

MEASUREMENT AFTER RECOGNITION

Alternative bases are available for the measurement after the recognition:

An entity should choose either the cost model or the revaluation model as its accounting policy and apply that policy to an entire property, plant, and equipment class.

Cost model:

After the recognition of an asset, a thing of property, plant, and equipment should be carried at its cost which is less than any accumulated depreciation and impairment losses.

Model of revaluation:

After several recognitions as an asset, an item of property, plant, and equipment whose fair value can be reliably measured and can be carried at an amount that can be revalued, being its fair value at the revaluation in Property, Plant and Equipment Accounting Standards.

The date that can be less than any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations are required that can be be carried out with sufficient regularity for ensuring that the carrying amount doesn’t materially differ from that which would be determined using fair value at the end of the reporting period.