Ind AS 16 Property, Plant And Equipment. Ind AS Workshop (Organised by YMEC of ICAI) Hotel Kempinski, Vishwas Nagar July 26, 2015

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1 Ind AS 16 Property, Plant And Equipment Ind AS Workshop (Organised by YMEC of ICAI) Hotel Kempinski, Vishwas Nagar July 26, 2015

2 Applicable Guidance IGAAP AS 10: Accounting for Fixed Assets AS 6 : Depreciation Accounting Schedule II of the Companies Act, 2013 Ind AS Ind AS 16 : Property, Plant and Equipment Appendix A : Change in existing decommissioning, Restoration and Similar Liabilities Appendix B : Stripping cost in the production phase of a surface mine IFRS IAS 16 : Property, Plant and Equipment IFRIC 1: Change in existing decommissioning, Restoration and Similar Liabilities IFRIC 20 : Stripping cost in the production phase of a surface mine

3 Session Take Away Scope and Definition of PPE Recognition and Measurement Componentisation Inspection and Overhauls Deferred Payment Terms Decommissioning and Site restoration cost Revaluation Fair Value Determination of carrying amount Depreciation charges Impairment losses Ind AS Vs IGAAP Carve Outs

4 Objectives of Ind AS 16 Prescribe the accounting treatment for PPE Recognition of the assets Determination of carrying amount Depreciation charges Impairment losses

5 Basic Asset Life Cycle

6 Property, Plant Equipment

7 Ind AS 16 applicable to all kinds of PPE except Ind AS 105 PPE classified as held for sale Ind AS 41 biological assets related to agricultural activity Ind AS 106 the recognition and measurement of exploration and evaluation assets mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources This Standard will be applicable to property, plant and equipment which are used to develop or maintain the above assets.

8 Definition of PPE Tangible items Held for use in production or supply of goods or services Expected to used during more than one period PPE AS 10 (IGAAP) Fixed asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business.

9 Recognition criteria Probable that future economic benefits will flow to entity Cost can be measured reliably Recognition of cost as an asset (PPE) AS 10 (IGAAP) - No Such specific recognition criteria. - Item which meet the definition of fixed asset will be recognised as a fixed asset

10 Spare parts or Servicing equipment Normally treated as inventory and expensed off as consumed Major spare parts and stand-by equipment expected to be used during more than one period are treated as PPE. (if they meet the definition of PPE as per Ind AS 16) Depreciated over the useful life of the main assets to which it relates. AS 10 (IGAAP) - Spare parts are capitalised, if they can be used only in connection with a fixed asset and whose use is expected to be irregular.

11 Component Accounting Separation of an asset into its significant components - Significant Cost of a part in proportion to total cost - May have different useful life. IGAAP Para 8.3 of AS 10 only touch upon on this issue and states that Accounting for FA may be improved if total cost thereof is allocated to its various parts.

12 Component Accounting The Companies Act, 2013 Mandatory as per Schedule II of the CA 2013 from April 1, (Voluntary for ) Bridges the gap under converged IFRS and Existing Scenario for this requirement. Imapct of moving to new regime of Ind AS??

13 SHIP: MV SANTA CLAUS Allocated cost Residual value Useful life Depreciation Keel 120,000,000 6,000, ,560,000 Bridge 70,000,000 10,500, ,380,000 Anchor windlass with chains 20,000,000 2,000, ,000 Bulkhead 90,000,000 9,900, ,005,000 Propulsion system 30,000,000 3,000, ,350,000 Decks 100,000,000 5,000, ,333,333 Boiler 10,000,000 1,000, ,000 Hydraulic crane 30,000,000 7,500, ,500,000 Turbine generator 20,000,000 1,000, ,266,667 Bow thruster 20,000,000 2,000, ,500,000 Refrigeration system 20,000,000 4,000, ,454,545 Fresh water generator 10,000,000 1,000, ,182 Life raft 10,000,000 1,000, ,000 Others 50,000,000 5,000, ,500, f 16 (revised): Plant Property & Equipment 600,000,000 58,900,000 31,887,727

14 Subsequent Costs Same criteria followed as of initial recognition. Probable that future economic benefits will flow and cost can be measured reliably. Day to day servicing cost which includes labour and consumables needs to be expensed off It can be in the form of followings: - Replacement Cost - Inspection Cost etc. AS 10 (IGAAP) Subsequent expenditures relating to an item of Fixed Assets should be added to its Book value only if they increase the future benefits from the existing asset beyond its previously assessed standard of performance.

15 Subsequent costs - Major inspections or overhauls Overhaul costs may involve three elements; Inspection, Replacement of parts and Major Maintenance. Cost of major inspection is recognised as PPE if it meets the asset recognition criteria. Any remaining carrying amount relating to the previous inspection is derecognized irrespective of whether previous inspection was separately identified and depreciated.

16 Case Study Uddan Ltd buys an aircraft for 90 Lakhs. Under civil aviation rules, the aircraft requires a major inspection every three years at a cost of 5 lakh. Three year after purchase it undergoes its first major inspection. The cost in relation to this inspection amounting to 7 Lakhs. Explain how the same should be accounted for in accordance with the requirements of Ind AS 16?

17 Solution The original carrying value would have been allocated as follows:- Aircraft + Cost of Inspection = 85 Lakhs + 5 Lakhs = 90 Lakhs Para 14 of Ind AS 16 provides that in such case Original cost of inspection is derecognised and the new inspection cost will be recognised in the carrying amount. So, New inspection cost will be accounted for as an asset addition and the original cost as an asset disposal. Gross Block Aircraft = 85 Lakhs Inspection Component = Original Cost of Inspection (-)derecognition of original inspection+ New inspection Cost = +5 Lakhs - 5 Lakhs + 7 Lakhs = 7 Lakhs

18 Measurement at initial recognition At cost only Purchase price including Import duties and non refundable taxes Costs of dismantling and removing the item and restoring Directly attributable costs for bringing the asset

19 Examples of directly attributable costs Costs of testing whether the asset is working properly after deducting proceeds from sale of any product produced during the testing period Installation and assembly costs Costs of site preparation Initial delivery and handling costs Cost of employee benefits Professional fees

20 Examples of not directly attributable costs Costs of conducting business in a new location or with a new class of customer (including costs of staff training) Costs incurred in introducing a new product or service Costs of opening a new facility Administration and other general overhead costs

21 Deferred Payment credit (Paragraph 23 and 72 of Ind AS 16) Cost of an item of PPE is the cash price equivalent at the recognition date. In case payment is deferred beyond normal credit terms: Difference between the cash price equivalent and total payment is recognised as interest over the period of credit unless such interest is capitalised. IGAAP Existing AS 10 does not contain this requirement.

22 Decommissioning cost IGAAP Existing AS 10 does not contain this requirement. Cost towards dismantling and removing the asset and restoring the original site after use For example : building an additional internal wall with condition that property will be returned in original state at the end of lease Corresponding obligation recognised as a provision under Ind AS 37 Typically arise in oil and gas, mining and electricity industries

23 Measurement subsequent to Initial recognition Can choose either Cost model or Revaluation model as its accounting policy Accounting policy should be applied to the whole of a class of property, plant and equipment and not merely to individual assets within a class.

24 Cost model Cost Accumulated depreciation accumulated impairment losses Carrying Amount

25 Revaluation Model After initial recognition, PPE to carried at revalued amount, being its fair value at the revaluation date. Revalued Amount on the date of revaluation Subsequent accumulated depreciation Subsequent accumulated impairment losses Carrying Amount If a single item of PPE is revalued, then the entire class of PPE to which that item belongs should be revalued. Class of assets : a grouping of assets of a similar nature and use in an entity s operations

26 At sufficient regularity such that the carrying amount does not differ materially from the fair value Valuations need not to be performed every year or every reporting period Where movement in fair values are volatile and significant-frequent revaluation Otherwise- every 3-5 years Imapct of moving to new regime of Ind AS?? Frequency of revaluations IGAAP (AS 10) - Systematic basis selection - No guidance on FV & frequency of revaluation

27 Revaluation gains and losses First Time Increase Decrease Debit the Asset Debit P&L account Credit the Revaluation reserve Credit the asset Subsequent Increase in value Decrease in value Increase in value Decrease in value Credit to Reserve and Surplus Debit to reserve and Surplus to the extent balance available and remaining to P&L Charged to P&L to the extent of earlier debit to P&L, Balance to Revaluation Reserve Charged to P&L account

28 Depreciation The depreciable amount of an asset should be allocated on a systematic basis over its useful life. Depreciation charges should be recognised as an expense unless they are included in the carrying amount of another asset.

29 Depreciation Depreciation of an asset begins when it is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management Depreciation is charged till point, residual value is greater than and equal to carrying amount. Depreciation ceases when an asset is derecognized or held for sale under Ind AS 105. Depreciation does not stop automatically when an asset is idle.

30 Method of depreciation The depreciation method adopted should reflect the pattern in which the asset s future economic benefits are expected to be consumed by the entity. If there is significant change in expected pattern of consumption,method of depreciation to be changed in lines with the future benefits. Method changes are accounted for as a change in an accounting estimate. (Ind AS 8) The method should result in a depreciation charge throughout the asset's useful life and not just towards the end of its useful life or when the asset is falling in value.

31 Change in estimate of useful life and residual value Useful life and residual value are to be reviewed at every year end. IGAAP (AS 6) - Useful life MAY be reviewed periodic - Change in depn method will be treated as change in accounting policy. If there is any change in Useful life/ RV, the same is treated as changes in estimates and accounting will be done prospectively. Future annual depreciation will be revised basis the new useful life. The method should result in a depreciation charge throughout the asset's useful life and not just towards the end of its useful life or when the asset is falling in value.

32 Carve Out in Ind AS 101 Use of carrying cost of Property, Plant and Equipment on the date of transition of First-time Adoption of Ind AS is permitted IFRS 1 : Items of Property, Plant and Equipment shall be determined by applying IAS 16 retrospectively or the same should be recorded at fair value on the date of transition. In case of old companies retrospective application of Ind AS 16 or fair values at the date of transition to determine deemed cost may not be possible for old assets. Accordingly, Ind AS 101, First-time Adoption of Ind AS, provides relief that an entity may use carrying values of all items of PPE on the date of transition in accordance with previous GAAP as an acceptable starting point under Ind AS.

33 Disclosures The measurement bases (for example cost or revaluation) The depreciation methods used (for example, straight-line method or declining balance method). The useful lives or the depreciation rates used. The gross carrying amount (cost or revalued amount) at both the beginning and end of the period. A reconciliation of the carrying amount at the beginning and end of the period separately disclosing: - Additions - Acquisitions through business combinations. - Revaluation increases or decreases. Existence and amounts of restrictions on title and property, plant and equipment pledged as security for liabilities.

34 Ind AS Vs IGAAP some key differences Property, Plant and Equipment Component Approach Cost of major inspections and overhauls. Asset dismantle, removal or restoration cost I GAAP Para 8.3 of AS 10 just touch upon that the accounting for an item of fixed asset may be improved if the total exp there on is allocated to its component parts Generally expensed when incurred No specific reference except AS 29 regarding the provision Ind AS Ind AS 16 mandates component accounting. Under this approach, each major part of an item of PPE with a cost that is significant, is depreciated separately. Capitalized only when it is probable that it will give rise to future economic benefits Present value of such cost, the obligation of which an entity incurs as a consequence of installing the item, is included as part of the cost of PPE.

35 Property,plant and equipment Revaluation Depreciation Method I GAAP Revaluation is permitted. No specific requirement on frequency of revaluation. Selection of asset for revaluation to be made on systematic basis (eg. a unit and not entire class) Earlier depreciation needs to be charged as per schedule XIV of CA, 1956 but as per Schedule II of CA 2013 depreciation is to be calculated as per useful life and the same has been specified in it. Ind AS Revaluation is required to be carried out at sufficient regularity. If revaluation model is adopted, the entire class of PPE has to be revalued. Depreciation to be calculated based on Useful life

36 Property,plant and equipment Change in depreciation method I GAAP Treated as change in accounting policy Ind AS Treated as change in accounting estimate Reassessment of depreciation method, useful life, and residual value Deferred payment terms No specific requirement No specific guidance under AS 10 for Assets acquired on deferred settlement terms. Generally financing element is not separated Reassessed at each balance sheet date. Difference between the purchase price under normal credit terms and the amount paid, is recognised as interest expense over the period of the financing.

37 Case Study AG Engineering Ltd has purchased a new item of manufacturing machinery for their industrial printing operation. It is a RTX 3000 printing press, which has been imported from an overseas supplier and will be transported from the docks to the factory by a convoy of heavy vehicles due to its large size and weight. The asset will be installed in the existing factory following the dismantling and removal of the old press, which is now obsolete owing to advances in technology. Determine if the following costs can be added to the invoiced purchase price and included in the initial recognition of the cost of the asset

38 State whether following cost should be Included or Excluded in PPE :- 1 A trade discount received of 5 % of the purchase price of the asset 2 VAT paid on the purchase 3 Interest paid on a short term loan taken to provide the necessary cash for payment of the purchase price 4 Import duties paid 5 Shipping costs and cost of road transport 6 Insurance for the shipping 7 An economic development rebate from the state Include/ Exclude Include Exclude Exclude Include Include Include Include

39 State whether following cost should be Included or Excluded in PPE :- 8 Cost of laying a new concrete slab and installing special rubber mounted footings for the new press in order to reduce vibration during use 9 Hire of a crane to transfer the press from the vehicles into the factory 10 Costs associated with removing a section of the factory roof to allow the machine to be dropped into place and subsequently refitting the roof 11 Cost of installing soundproofing in the roof at the same time in order to provide protection for workers in other parts of the factory building 12 Professional fees charged by consulting engineer for overseeing the installation process 13 Electricians fees for connecting the press to the power supply 14 A portion of the operating costs (salaries, office expenses) of the purchasing department Include/ Exclude Include Include Include Exclude Include Include Exclude

40 State whether following cost should be Included or Excluded in PPE :- 15 Costs of materials (papers and inks) used in calibrating the machine and setting it up for operation 16 Costs of training the operators of the new machine 17 A portion of the inefficiencies in production for the first month of use while the operators became comfortable with using the machine Include/ Exclude Include Exclude Exclude

41 Thank You Presented by : Alok Kumar Garg CA, CS, CIFRS (ICAI), B.Com (Hons.) dial

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