Exposure Draft
Accounting Standard (AS) 16
Property, Plant and Equipment
Last date for the comments: 24th February, 2018
Issued by
Accounting Standards Board
The Institute of Chartered Accountants of India
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Exposure Draft Accounting Standard (AS) 16
Property, Plant and Equipment
(The Indian Accounting Standards (Ind AS), as notified by the Ministry of Corporate Affairs in
February, 2015, have been applicable to the specified class of companies. For other class of
companies, i.e., primarily the unlisted companies having net worth less than Rs. 250 crores,
Accounting Standards, as notified under Companies (Accounting Standards) Rules, 2006, have
been applicable. However, the Ministry of Corporate Affairs has requested the Accounting
Standards Board of the Institute of Chartered Accountants of India (ICAI) to upgrade
Accounting Standards, as notified under Companies (Accounting Standards) Rules, 2006, to
bring them nearer to Indian Accounting Standards. Accordingly, the Accounting Standards
Board of ICAI has initiated the process of upgradation of these standards which will be
applicable to all companies having net-worth less than Rs. 250 crores including non-corporate
entities.
AS 10 has been taken as the base for formulating the upgraded Standard on Property, Plant and
Equipment. The upgraded Standard on AS 16 is almost similar to AS 10. However, there are
certain differences between draft AS 16 and AS 10. An appendix covering major differences
between draft AS 16 and AS 10 is included in the draft Standard. Similarly, major differences
between draft AS 16 and Ind AS 16 are given in another appendix of this draft Standard.)
Following is the Exposure Draft of the Accounting Standard (AS) 16, Property, Plant and
Equipment, issued by the Accounting Standards Board of the Institute of Chartered Accountants
of India, for comments. The Board invites comments on any aspect of this Exposure Draft.
Comments are most helpful if they indicate the specific paragraph or group of paragraphs to
which they relate, contain a clear rationale and, where applicable, provide a suggestion for
alternative wording.
How to Comment
Comments can be submitted using one of the following methods so as to receive not later than
24th February, 2018:
1. Electronically: Visit the following link
http://www.icai.org/comments/asb/
2. Email: Comments can be sent at commentsasb@icai.in
3. Postal: Secretary, Accounting Standards Board,
The Institute of Chartered Accountants of India, ICAI Bhawan,
Post Box No. 7100, Indraprastha Marg, New Delhi 110 002
Further clarifications on any aspect of this Exposure Draft may be sought by email to
asb@icai.in.
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Questions for respondents
Question 1
(a) Ind AS 16, Property, Plant and Equipment requires that land and buildings are separable assets and
are accounted for separately, even when they are acquired together. Similar provisions are given in
the draft AS 16. Do you agree with this?
(b) If you do not agree with (a) above, do you agree that land and building should be accounted for
together unless acquired separately. What are your views with regard to computation of depreciation
in such a case?
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Accounting Standard (AS) 16
Property, Plant and Equipment
(This Accounting Standard includes paragraphs set in bold type and plain type, which have
equal authority. Paragraphs in bold type indicate the main principles
Objective
1. The objective of this Standard is to prescribe the accounting treatment for property, plant
and equipment so that users of the financial statements can discern information about
investment made by an entity 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.
Scope
2. This Standard should be applied in accounting for property, plant and equipment
except when another Accounting Standard requires or permits a different
accounting treatment.
3. This Standard does not apply to:
(a) [Refer Appendix 1].
(b) biological assets related to agricultural activity other than bearer plants. This
Standard applies to bearer plants but it does not apply to the produce on bearer
plants.
(c) [Refer Appendix 1]
(d) wasting assets including mineral rights, expenditure on the exploration for and
extraction of minerals, 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 (a) and (b) above.
4. Other Accounting Standards may require recognition of an item of property, plant and
equipment based on an approach different from that in this Standard. For example, AS
19, Leases, requires an entity to evaluate its recognition of an item of leased property,
plant and equipment on the basis of the transfer of risks and rewards. However, in such
cases other aspects of the accounting treatment for these assets, including depreciation,
are prescribed by this Standard.
5. An entity accounting for investment property in accordance with AS 40, Investments
Property, shall use the cost model in this standard.
Definitions
6. The following terms are used in this Standard with the meanings specified:
Bearer plant is a plant that
(a) is used in the production or supply of agricultural produce;
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(b) is expected to bear produce for more than a period of twelve months; and
(c) has a remote likelihood of being sold as agricultural produce, except for
incidental scrap sales.
Carrying amount is the amount at which an asset is recognised after deducting any
accumulated depreciation and accumulated impairment losses.
Cost is the amount of cash or cash equivalents paid or the fair value of the other
consideration given to acquire an asset at the time of its acquisition or construction
or, where applicable, the amount attributed to that asset when initially recognised in
accordance with the specific requirements of other Accounting Standards.
Depreciable amount is the cost of an asset, or other amount substituted for cost, less
its residual value.
Depreciation is the systematic allocation of the depreciable amount of an asset over
its useful life.
Entity -specific value is the present value of the cash flows an entity expects to arise
from the continuing use of an asset and from its disposal at the end of its useful life
or expects to incur when settling a liability.
Fair value is the value as defined under AS 113, Fair Value Measurement. .
Gross carrying amount of an asset is its cost or other amount substituted for the cost
in the books of account, without making any deduction for accumulated
depreciation and accumulated impairment losses.
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 a period of twelve months.
Recoverable amount is the higher of an asset's net selling price 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.
Recognition
7. The cost of an item of property, plant and equipment should be recognised as an
asset if, and only if:
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(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.
8. Items such as spare parts, stand-by equipment and servicing equipment are recognised in
accordance with this Standard when they meet the definition of property, plant and
equipment. Otherwise, such items are classified as inventory.
9. This Standard does not prescribe the unit of measure for recognition, i.e., what constitutes
an item of property, plant and equipment. Thus, judgement is required in applying the
recognition criteria to specific circumstances of an entity. An example of a `unit of
measure' can be a `project' of construction of a manufacturing plant rather than
individual assets comprising the project in appropriate cases for the purpose of
capitalisation of expenditure incurred during construction period. Similarly, it may be
appropriate to aggregate individually insignificant items, such as moulds, tools and dies
and to apply the criteria to the aggregate value. An entity may decide to expense an item
which could otherwise have been included as property, plant and equipment, because
the amount of the expenditure is not material.
10. An entity evaluates under this recognition principle all its costs on property, plant and
equipment at the time they are incurred. These costs include costs incurred:
(a) initially to acquire or construct an item of property, plant and equipment; and
(b) subsequently to add to, replace part of, or service it.
Initial Costs
11. The definition of `property, plant and equipment' covers tangible items which are held
for use or for administrative purposes. The term `administrative purposes' has been used
in wider sense to include all business purposes other than production or supply of goods
or services or for rental for others. Thus, property, plant and equipment would include
assets used for selling and distribution, finance and accounting, personnel and other
functions of an entity. Items of property, plant and equipment may also be acquired for
safety or environmental reasons. The acquisition of such property, plant and equipment,
although not directly increasing the future economic benefits of any particular existing
item of property, plant and equipment, may be necessary for an entity to obtain the future
economic benefits from its other assets. Such items of property, plant and equipment
qualify for recognition as assets because they enable an entity to derive future economic
benefits from related assets in excess of what could be derived had those items not been
acquired. For example, a chemical manufacturer may install new chemical handling
processes to comply with environmental requirements for the production and storage of
dangerous chemicals; related plant enhancements are recognised as an asset because
without them the entity is unable to manufacture and sell chemicals. The resulting
carrying amount of such an asset and related assets is reviewed for impairment in
accordance with AS 36, Impairment of Assets.
Subsequent Costs
12. Under the recognition principle in paragraph 7, an entity does not recognise in the
carrying amount of an item of property, plant and equipment the costs of the day-to-day
servicing of the item. Rather, these costs are recognised in the statement of profit and loss
as incurred. Costs of day-to-day servicing are primarily the costs of labour and
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consumables, and may include the cost of small parts. The purpose of such expenditures
is often described as for the `repairs and maintenance' of the item of property, plant and
equipment.
13. Parts of some items of property, plant and equipment may require replacement at regular
intervals. For example, a furnace may require relining after a specified number of hours
of use, or aircraft interiors such as seats and galleys may require replacement several
times during the life of the airframe. Similarly, major parts of conveyor system, such as,
conveyor belts, wire ropes, etc., may require replacement several times during the life of
the conveyor system. Items of property, plant and equipment may also be acquired to
make a less frequently recurring replacement, such as replacing the interior walls of a
building, or to make a non-recurring replacement. Under the recognition principle in
paragraph 7, an entity recognises in the carrying amount of an item of property, plant and
equipment the cost of replacing part of such an item when that cost is incurred if the
recognition criteria are met. The carrying amount of those parts that are replaced is
derecognised in accordance with the derecognition provisions of this Standard (see
paragraphs 67-72).
14. A condition of continuing to operate an item of property, plant and equipment (for
example, an aircraft) may be performing regular major inspections for faults regardless of
whether parts of the item are replaced. When each major inspection is performed, its cost
is recognised in the carrying amount of the item of property, plant and equipment as a
replacement if the recognition criteria are satisfied. Any remaining carrying amount of
the cost of the previous inspection (as distinct from physical parts) is derecognised.
14A The derecognition of the carrying amount as stated in paragraphs 13-14 occurs regardless
of whether the cost of the previous part / inspection was identified in the transaction in
which the item was acquired or constructed. If it is not practicable for an entity to
determine the carrying amount of the replaced part/ inspection, it may use the cost of the
replacement or the estimated cost of a future similar inspection as an indication of what
the cost of the replaced part/ existing inspection component was when the item was
acquired or constructed.
Measurement at Recognition
15. An item of property, plant and equipment that qualifies for recognition as an asset
should be measured at its cost.
Elements of Cost
16. The cost of an item of property, plant and equipment comprises:
(a) its purchase price, including import duties and non refundable purchase taxes,,
after deducting trade discounts and rebates.
(b) any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by
management.
(c) the initial estimate of the costs of dismantling, removing the item and restoring
the site on which it is located, referred to as `decommissioning, restoration and
similar liabilities', the obligation for which an entity incurs either when the item is
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acquired or as a consequence of having used the item during a particular period
for purposes other than to produce inventories during that period.
17. Examples of directly attributable costs are:
(a) costs of employee benefits (as defined in AS 19, Employee Benefits) arising
directly from the construction or acquisition of the item of property, plant and
equipment;
(b) costs of site preparation;
(c) initial delivery and handling costs;
(d) installation and assembly costs;
(e) costs of testing whether the asset is functioning properly, after deducting the net
proceeds from selling any items produced while bringing the asset to that location
and condition (such as samples produced when testing equipment); and
(f) professional fees.
18 An entity applies AS 2, Valuation of Inventories, to the costs of obligations for
dismantling, removing and restoring the site on which an item is located that are
incurred during a particular period as a consequence of having used the item to produce
inventories during that period. The obligations for costs accounted for in accordance
with AS 2 or AS 16 are recognised and measured in accordance with AS 37, Provisions,
Contingent Liabilities and Contingent Assets.
19 Examples of costs that are not costs of an item of property, plant and equipment are:
(a) costs of opening a new facility or business, such as, inauguration costs;
(b) costs of introducing a new product or service( including costs of advertising and
promotional activities);
(c) costs of conducting business in a new location or with a new class of customer
(including costs of staff training); and
(d) administration and other general overhead costs.
20 Recognition of costs in the carrying amount of an item of property, plant and equipment
ceases when the item is in the location and condition necessary for it to be capable of
operating in the manner intended by management. Therefore, costs incurred in using or
redeploying an item are not included in the carrying amount of that item. For example,
the following costs are not included in the carrying amount of an item of property, plant
and equipment:
(a) 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;
(b) initial operating losses, such as those incurred while demand for the output of an
item builds up; and
(c) costs of relocating or reorganising part or all of the operations of an entity.
21 Some operations occur in connection with the construction or development of an item of
property, plant and equipment, but are not necessary to bring the item to the location and
condition necessary for it to be capable of operating in the manner intended by
management. These incidental operations may occur before or during the construction or
development activities. For example, income may be earned through using a building
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site as a car park until construction starts. Because incidental operations are not
necessary to bring an item to the location and condition necessary for it to be capable of
operating in the manner intended by management, the income and related expenses of
incidental operations are recognised in the statement of profit and loss and included in
their respective classifications of income and expense.
22 The cost of a self-constructed asset is determined using the same principles as for an
acquired asset. If an entity makes similar assets for sale in the normal course of business,
the cost of the asset is usually the same as the cost of constructing an asset for sale (see
AS 2). Therefore, any internal profits are eliminated in arriving at such costs. Similarly,
the cost of abnormal amounts of wasted material, labour, or other resources incurred in
self-constructing an asset is not included in the cost of the asset. AS 23, Borrowing
Costs, establishes criteria for the recognition of interest as a component of the carrying
amount of a self-constructed item of property, plant and equipment.
22A. Bearer plants are accounted for in the same way as self-constructed items of property,
plant and equipment before they are in the location and condition necessary to be
capable of operating in the manner intended by management. Consequently, references
to `construction' in this Standard should be read as covering activities that are necessary
to cultivate the bearer plants before they are in the location and condition necessary to be
capable of operating in the manner intended by management .
Measurement of Cost
23 The cost of an item of property, plant and equipment is the cash price equivalent at the
recognition date. If payment is deferred beyond normal credit terms, the difference
between the cash price equivalent and the total payment is recognised as interest over
the period of credit unless such interest is capitalised in accordance with AS 23.
24 One or more items of property, plant and equipment may be acquired in exchange for a
non-monetary asset or assets, or a combination of monetary and non-monetary assets.
The following discussion refers simply to an exchange of one non-monetary asset for
another, but it also applies to all exchanges described in the preceding sentence. The cost
of such an item of property, plant and equipment is measured at fair value unless (a) the
exchange transaction lacks commercial substance or (b) the fair value of neither the
asset(s) received nor the asset(s) given up is reliably measurable. The acquired item(s)
is/are measured in this manner even if an entity cannot immediately derecognise the
asset given up. If the acquired item(s) is/are not measured at fair value, its/their cost is
measured at the carrying amount of the asset(s) given up.
25 An entity determines whether an exchange transaction has commercial substance by
considering the extent to which its future cash flows are expected to change as a result of
the transaction. An exchange transaction has commercial substance if:
(a) the configuration (risk, timing and amount) of the cash flows of the asset received
differs from the configuration of the cash flows of the asset transferred; or
(b) the entity-specific value of the portion of the operations of the entity affected by
the transaction changes as a result of the exchange;
(c) and the difference in (a) or (b) is significant relative to the fair value of the assets
exchanged.
For the purpose of determining whether an exchange transaction has commercial
substance, the entity -specific value of the portion of operations of the entity affected by
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the transaction should reflect post-tax cash flows. In certain cases, the result of these
analyses may be clear without an entity having to perform detailed calculations.
26 The fair value of an asset is reliably measurable if (a) the variability in the range of
reasonable fair value measurements is not significant for that asset or (b) the
probabilities of the various estimates within the range can be reasonably assessed and
used when measuring fair value. If an entity is able to measure reliably the fair value of
either the asset received or the asset given up, then the fair value of the asset given up is
used to measure the cost of the asset received unless the fair value of the asset received
is more clearly evident.
26A Where several items of property, plant and equipment are purchased for a consolidated
price, cost should be measured in accordance with AS 103.
27 The cost of an item of property, plant and equipment held by a lessee under a finance
lease is determined in accordance with AS 17, Leases.
28. The carrying amount of an item of property, plant and equipment may be reduced by
government grants in accordance with AS 20, Accounting for Government Grants.
Measurement after Recognition
29. An entity should choose either the cost model in paragraph 30 or the revaluation
model in paragraph 31 as its accounting policy and should apply that policy to an
entire class of property, plant and equipment.
Cost Model
30 After recognition as an asset, an item of property, plant and equipment should be
carried at its cost less any accumulated depreciation and any accumulated
impairment losses.
Revaluation Model
31 After recognition as an asset, an item of property, plant and equipment whose fair
value can be measured reliably should be carried at a revalued amount, being its
fair value at the date of the revaluation less any subsequent accumulated
depreciation and subsequent accumulated impairment losses. Revaluations should
be made with sufficient regularity to ensure that the carrying amount does not
differ materially from that which would be determined using fair value at the
balance sheet date.
32 [Refer Appendix 1].
33 [Refer Appendix 1].
34 The frequency of revaluations depends upon the changes in fair values of the items of
property, plant and equipment being revalued. When the fair value of a revalued asset
differs materially from its carrying amount, a further revaluation is required. Some items
of property, plant and equipment experience significant and volatile changes in fair
value, thus necessitating annual revaluation. Such frequent revaluations are unnecessary
for items of property, plant and equipment with only insignificant changes in fair value.
Instead, it may be necessary to revalue the item only every three or five years.
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35 When an item of property, plant and equipment is revalued, the carrying amount of that
asset is adjusted to the revalued amount. At the date of the revaluation, the asset is
treated in one of the following ways:
(a) the gross carrying amount is adjusted in a manner that is consistent with the
revaluation of the carrying amount of the asset. For example, the gross carrying
amount may be restated by reference to observable market data or it may be
restated proportionately to the change in the carrying amount. The accumulated
depreciation at the date of the revaluation is adjusted to equal the difference
between the gross carrying amount and the carrying amount of the asset after
taking into account accumulated impairment losses; or
(b) the accumulated depreciation is eliminated against the gross carrying amount of
the asset.
The amount of the adjustment of accumulated depreciation forms part of the increase or
decrease in carrying amount that is accounted for in accordance with paragraphs 39 and
40.
36 If an item of property, plant and equipment is revalued, the entire class of property,
plant and equipment to which that asset belongs should be revalued.
37 A class of property, plant and equipment is a grouping of assets of a similar nature and
use in operations of an entity. The following are examples of separate classes:
(a) land;
(b) land and buildings;
(c) machinery;
(d) ships;
(e) aircraft;
(f) motor vehicles;
(g) furniture and fixtures;
(h) office equipment;and
(i) bearer plants.
38. The items within a class of property, plant and equipment are revalued simultaneously to
avoid selective revaluation of assets and the reporting of amounts in the financial
statements that are a mixture of costs and values as at different dates. However, a class of
assets may be revalued on a rolling basis provided revaluation of the class of assets is
completed within a short period and provided the revaluations are kept up to date.
39. 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.
40 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
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comprehensive income reduces the amount accumulated in equity under the
heading of revaluation surplus.
41 The revaluation surplus included in equity in respect of an item of property, plant and
equipment may be transferred directly to retained earnings when the asset is
derecognised. This may involve transferring the whole of the surplus when the asset is
retired or disposed of. However, some of the surplus may be transferred as the asset is
used by an entity. In such a case, the amount of the surplus transferred would be the
difference between depreciation based on the revalued carrying amount of the asset and
depreciation based on its original cost. Transfers from revaluation surplus to the retained
earnings are not made through the profit or loss.
42. The effects of taxes on income, if any, resulting from the revaluation of property, plant
and equipment are recognised and disclosed in accordance with AS 12, Income Taxes.
Depreciation
43 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.
44 An entity allocates the amount initially recognised in respect of an item of property, plant
and equipment to its significant parts and depreciates each such part separately. For
example, it may be appropriate to depreciate separately the airframe and engines of an
aircraft, whether owned or subject to a finance lease.
45 A significant part of an item of property, plant and equipment may have a useful life and a
depreciation method that are the same as the useful life and the depreciation method of
another significant part of that same item. Such parts may be grouped in determining the
depreciation charge.
46 To the extent that an entity depreciates separately some parts of an item of property, plant
and equipment, it also depreciates separately the remainder of the item. The remainder
consists of the parts of the item that are individually not significant. If an entity has
varying expectations for these parts, approximation techniques may be necessary to
depreciate the remainder in a manner that faithfully represents the consumption pattern
and/or useful life of its parts.
47 An entity may choose to depreciate separately the parts of an item that do not have a cost
that is significant in relation to the total cost of the item.
48 The depreciation charge for each period should be recognised in the statement of
profit and loss unless it is included in the carrying amount of another asset.
49 The depreciation charge for a period is usually recognised in the statement of profit and
loss. However, sometimes, the future economic benefits embodied in an asset are
absorbed in producing other assets. In this case, the depreciation charge constitutes part
of the cost of the other asset and is included in its carrying amount. For example, the
depreciation of manufacturing plant and equipment is included in the costs of conversion
of inventories (see AS 2). Similarly, the depreciation of property, plant and equipment
used for development activities may be included in the cost of an intangible asset
recognised in accordance with AS 38, Intangible Assets.
Depreciable Amount and Depreciation Period
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50 The depreciable amount of an asset should be allocated on a systematic basis over its
useful life.
51 The residual value and the useful life of an asset should be reviewed and changed 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 AS 8, Accounting Policies, Changes in Accounting Estimates and
Errors.
52 Depreciation is recognised even if the fair value of the asset exceeds its carrying amount,
as long as the asset's residual value does not exceed its carrying amount. Repair and
maintenance of an asset do not negate the need to depreciate it.
53 The depreciable amount of an asset is determined after deducting its residual value.
54 The residual value of an asset may increase to an amount equal to or greater than its
carrying amount. If it does, depreciation charge of the asset is zero unless and until its
residual value subsequently decreases to an amount below its carrying amount.
55 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 of an asset ceases at the earlier of the date that the asset is
retired from active use and is held for disposal and the date that the asset is derecognised.
Therefore, depreciation does not cease when the asset becomes idle or is retired from
active use (but not held for disposal) unless the asset is fully depreciated. However, under
usage methods of depreciation, the depreciation charge can be zero while there is no
production.
56 The future economic benefits embodied in an asset are consumed by an entity principally
through its use. However, other factors, such as technical or commercial obsolescence
and wear and tear while an asset remains idle, often result in the diminution of the
economic benefits that might have been obtained from the asset. Consequently, all the
following factors are considered in determining the useful life of an asset:
(a) expected usage of the asset. Usage is assessed by reference to the expected
capacity or physical output of the asset.
(b) expected physical wear and tear, which depends on operational factors such as the
number of shifts for which the asset is to be used and the repair and maintenance
programme, and the care and maintenance of the asset while idle.
(c) technical or commercial obsolescence arising from changes or improvements in
production, or from a change in the market demand for the product or service
output of the asset. Expected future reductions in the selling price of an item that
was produced using an asset could indicate the expectation of technical or
commercial obsolescence of the asset, which, in turn, might reflect a reduction of
the future economic benefits embodied in the asset.
(d) legal or similar limits on the use of the asset, such as the expiry dates of related
leases.
57 The useful life of an asset is defined in terms of its expected utility to the entity. The asset
management policy of the entity may involve the disposal of assets after a specified time
or after consumption of a specified proportion of the future economic benefits embodied
in the asset. Therefore, the useful life of an asset may be shorter than its economic life.
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The estimation of the useful life of the asset is a matter of judgement based on the
experience of the entity with similar assets.
58 Land and buildings are separable assets and are accounted for separately, even when they
are acquired together. With some exceptions, such as quarries and sites used for landfill,
land has an unlimited useful life and therefore is not depreciated. Buildings have a
limited useful life and therefore are depreciable assets. An increase in the value of the
land on which a building stands does not affect the determination of the depreciable
amount of the building.
59 If the cost of land includes the costs of site dismantlement, removal and restoration, that
portion of the land asset is depreciated over the period of benefits obtained by incurring
those costs. In some cases, the land itself may have a limited useful life, in which case it
is depreciated in a manner that reflects the benefits to be derived from it.
Depreciation Method
60 The depreciation method used should reflect the pattern in which the future
economic benefits of the asset are expected to be consumed by the entity.
61 The depreciation method applied to an asset should be reviewed at least at each
financial year-end and, if there has been a significant change in the expected pattern
of consumption of the future economic benefits embodied in the asset, the method
should be changed to reflect the changed pattern reviewed and changed. Such a
change should be accounted for as a change in an accounting estimate in accordance
with AS 5.
62 A variety of depreciation methods can be used to allocate the depreciable amount of an
asset on a systematic basis over its useful life. These methods include the straight-line
method, the diminishing balance method and the units of production method. Straight-
line depreciation results in a constant charge over the useful life if the residual value of
the asset does not change. The diminishing balance method results in a decreasing charge
over the useful life. The units of production method results in a charge based on the
expected use or output. The entity selects the method that most closely reflects the
expected pattern of consumption of the future economic benefits embodied in the asset.
That method is applied consistently from period to period unless there is a change in the
expected pattern of consumption of those future economic benefits or that the method is
changed in accordance with the statute to best reflect the way the asset is consumed
62A A depreciation method that is based on revenue that is generated by an activity that
includes the use of an asset is not appropriate. The revenue generated by an activity that
includes the use of an asset generally reflects factors other than the consumption of the
economic benefits of the asset. For example, revenue is affected by other inputs and
processes, selling activities and changes in sales volumes and prices. The price
component of revenue may be affected by inflation, which has no bearing upon the way
in which an asset is consumed.
Impairment
63. To determine whether an item of property, plant and equipment is impaired, an entity
applies AS 36, Impairment of Assets. AS 36 explains how an entity reviews the carrying
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amount of its assets, how it determines the recoverable amount of an asset, and when it
recognises, or reverses the recognition of, an impairment loss.
64 [Refer Appendix 1]
Compensation for Impairment
65 Compensation from third parties for items of property, plant and equipment that
were impaired, lost or given up should be included in the statement of profit and
loss when the compensation becomes receivable.
66 Impairments or losses of items of property, plant and equipment, related claims for or
payments of compensation from third parties and any subsequent purchase or
construction of replacement assets are separate economic events and are accounted for
separately as follows:
(a) impairments of items of property, plant and equipment are recognised in
accordance with AS 36;
(b) derecognition of items of property, plant and equipment retired or disposed of is
determined in accordance with this Standard;
(c) compensation from third parties for items of property, plant and equipment that
were impaired, lost or given up is included in determining profit or loss when it
becomes receivable; and
(d) the cost of items of property, plant and equipment restored, purchased or
constructed as replacements is determined in accordance with this Standard.
Retirements
66A 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. Any
write-down in this regard should be recognised immediately in the statement of
profit and loss.
Derecognition
67 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.
68 The gain or loss arising from the derecognition of an item of property, plant and
equipment should be included in the statement of profit and loss when the item is
derecognised (unless AS 17, Leases, requires otherwise on a sale and leaseback).
Gains should not be classified as revenue, as defined in AS 18, Revenue Recognition.
68A However, an entity that in the course of its ordinary activities, routinely sells items
of property, plant and equipment that it had held for rental to others should
transfer such assets to inventories at their carrying amount when they cease to be
rented and become held for sale. The proceeds from the sale of such assets should be
recognised in revenue in accordance with AS 18, Revenue Recognition.
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69 The disposal of an item of property, plant and equipment may occur in a variety of ways
(e.g. by sale, by entering into a finance lease or by donation). In determining the date of
disposal of an item, an entity applies the criteria in AS 18 for recognising revenue from
the sale of goods. AS 17, Leases, applies to disposal by a sale and leaseback.
70 If, under the recognition principle in paragraph 7, an entity recognises in the carrying
amount of an item of property, plant and equipment the cost of a replacement for part of
the item, then it derecognises the carrying amount of the replaced part regardless of
whether the replaced part had been depreciated separately. If it is not practicable for an
entity to determine the carrying amount of the replaced part, it may use the cost of the
replacement as an indication of what the cost of the replaced part was at the time it was
acquired or constructed.
71 The gain or loss arising from the derecognition of an item of property, plant and
equipment should be determined as the difference between the net disposal
proceeds, if any, and the carrying amount of the item.
72 The consideration receivable on disposal of an item of property, plant and equipment is
recognised in accordance with the principles enunciated in AS 18.
Disclosure
73 The financial statements should disclose, for each class of property, plant and
equipment:
(a) the measurement bases (i.e., cost model or revaluation model) used for
determining the gross carrying amount;
(b) the depreciation methods used;
(c) the useful lives or the depreciation rates used. In case the useful lives or the
depreciation rates used are different from those specified in the statute
governing the entity, it should make a specific mention of that fact;
(d) the gross carrying amount and the accumulated depreciation (aggregated
with accumulated impairment losses) at the beginning and end of the
period; and
(e) a reconciliation of the carrying amount at the beginning and end of the
period showing:
(i) additions;
(ii) assets retired from active use and held for disposal;
(iii) acquisitions through business combinations ;
(iv) increases or decreases resulting from revaluations under paragraphs
31, 39 and 40 and from impairment losses recognised or reversed
directly in other comprehensive income in accordance with AS 36;
(v) impairment losses recognised in the statement of profit and loss in
accordance with AS 36;
(vi) impairment losses reversed in the statement of profit and loss in
accordance with AS 36;
(vii) depreciation;
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(viii) the net exchange differences arising on the translation of the financial
statements of a non-integral foreign operation in accordance with AS
21, The Effects of Changes in Foreign Exchange Rates; and
(ix) other changes.
74 The financial statements should also disclose:
(a) the existence and amounts of restrictions on title, and property, plant and
equipment pledged as security for liabilities;
(b) the amount of expenditure recognised in the carrying amount of an item of
property, plant and equipment in the course of its construction;
(c) the amount of contractual commitments for the acquisition of property, plant
and equipment;
(d) if it is not disclosed separately on the face of the statement of profit and loss,
the amount of compensation from third parties for items of property, plant
and equipment that were impaired, lost or given up that is included in the
statement of profit and loss; and
(e) the amount of assets retired from active use and held for disposal.
75 Selection of the depreciation method and estimation of the useful life of assets are matters
of judgement. Therefore, disclosure of the methods adopted and the estimated useful lives
or depreciation rates provides users of financial statements with information that allows
them to review the policies selected by management and enables comparisons to be made
with other entities. For similar reasons, it is necessary to disclose:
(a) depreciation, whether recognised in the statement of profit and loss or as a part of
the cost of other assets, during a period; and
(b) accumulated depreciation at the end of the period.
76 In accordance with AS 8, an entity discloses the nature and effect of a change in an
accounting estimate that has an effect in the current period or is expected to have an effect
in subsequent periods. For property, plant and equipment, such disclosure may arise from
changes in estimates with respect to:
(a) residual values;
(b) the estimated costs of dismantling, removing or restoring items of property, plant
and equipment;
(c) useful lives; and
(d) depreciation methods.
77 If items of property, plant and equipment are stated at revalued amounts, the
following should be disclosed:
(a) the effective date of the revaluation;
(b) whether an independent valuer was involved; and
(c) [Refer Appendix 1]
(d) [Refer Appendix 1]
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(e) [Refer Appendix 1]
(f) the revaluation surplus, indicating the change for the period and any
restrictions on the distribution of the balance to shareholders.
78 [Refer Appendix 1]
79 [Refer Appendix 1]
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Appendix A
Changes in Existing Decommissioning, Restoration and Similar
Liabilities
This Appendix is an integral part of the AS.
Background
1 Many entities have obligations to dismantle, remove and restore items of property, plant
and equipment. In this Appendix such obligations are referred to as `decommissioning,
restoration and similar liabilities'. Under AS 16, the cost of an item of property, plant and
equipment includes the initial estimate of the costs of dismantling and removing the item
and restoring the site on which it is located, the obligation for which an entity incurs either
when the item is acquired or as a consequence of having used the item during a particular
period for purposes other than to produce inventories during that period. AS 37 contains
requirements on how to measure decommissioning, restoration and similar liabilities. This
Appendix provides guidance on how to account for the effect of changes in the
measurement of existing decommissioning, restoration and similar liabilities.
Scope
2 This Appendix applies to changes in the measurement of any existing decommissioning,
restoration or similar liability that is recognised as part of the cost of an item of property,
plant and equipment in accordance with AS 16 and recognised as liability in accordance
with AS 37.
For example, a decommissioning, restoration or similar liability may exist for
decommissioning a plant, rehabilitating environmental damage in extractive industries, or
removing equipment.
Issue
3 This Appendix addresses how the effect of the following events that change the
measurement of an existing decommissioning, restoration or similar liability should be
accounted for:
(a) a change in the estimated outflow of resources embodying economic benefits (eg cash
flows) required to settle the obligation;
(b) a change in the current market-based discount rate as defined in paragraph 47 of AS
37 (this includes changes in the time value of money and the risks specific to the
liability); and
(c) an increase that reflects the passage of time (also referred to as the unwinding of the
discount).
Accounting Principles
4 The cost of property, plant and equipment may undergo changes subsequent to its
acquisition or construction on account of changes in liabilities, price adjustments, changes
in duties, changes in initial estimates of amounts provided for dismantling, removing,
restoration and similar factors and included in the cost of the asset in accordance with
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paragraph 16. Such changes in cost should be accounted for in accordance with paragraphs
5-7 below.
5 If the related asset is measured using the cost model:
(a) subject to (b), changes in the liability should be added to, or deducted from, the cost
of the related asset in the current period.
(b) the amount deducted from the cost of the asset should not exceed its carrying amount.
If a decrease in the liability exceeds the carrying amount of the asset, the excess
should be recognised immediately in the statement of profit and loss.
(c) if the adjustment results in an addition to the cost of an asset, the entity should
consider whether this is an indication that the new carrying amount of the asset may
not be fully recoverable. If it is such an indication, the entity should test the asset for
impairment by estimating its recoverable amount, and should account for any
impairment loss, in accordance with AS 36.
6 If the related asset is measured using the revaluation model:
(a) changes in the liability alter the revaluation surplus or deficit previously recognised
on that asset, so that:
(i) a decrease in the liability shall (subject to (b)) be recognised in other
comprehensive income and increase the revaluation surplus within equity,
except that it shall be recognised in profit or loss to the extent that it reverses
a revaluation deficit on the asset that was previously recognised in profit or
loss;
(ii) an increase in the liability shall be recognised in profit or loss, except that it
shall be recognised in other comprehensive income and reduce the
revaluation surplus within equity to the extent of any credit balance existing
in the revaluation surplus in respect of that asset.
(b) in the event that a decrease in the liability exceeds the carrying amount that would
have been recognised had the asset been carried under the cost model, the excess
should be recognised immediately in the statement of profit and loss.
(c) a change in the liability is an indication that the asset may have to be revalued in
order to ensure that the carrying amount does not differ materially from that which
would be determined using fair value at the end of the reporting period. Any such
revaluation shall be taken into account in determining the amounts to be recognised
in profit or loss or in other comprehensive income under (a). If a revaluation is
necessary, all assets of that class shall be revalued.
(d) AS 1 requires disclosure in the statement of profit and loss of each component of
other comprehensive income or expense. In complying with this requirement, the
change in the revaluation surplus arising from a change in the liability shall be
separately identified and disclosed as such.
7 The adjusted depreciable amount of the asset is depreciated over its useful life. Therefore,
once the related asset has reached the end of its useful life, all subsequent changes in the
liability should be recognised in the statement of profit and loss as they occur. This applies
under both the cost model and the revaluation model.
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8 The periodic unwinding of the discount shall be recognised in profit or loss as a finance
cost as it occurs. Capitalisation under Ind AS 23 is not permitted.
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Appendix 1
Note: This Appendix is not a part of the Accounting Standard. The purpose of this Appendix is
only to bring out the major differences, if any, between Indian Accounting Standard (Ind AS) 16
and Accounting Standard (AS) 16, Property, Plant and Equipment
Comparison with Ind AS 16, Property, Plant and Equipment
1. Ind AS 16 does not deal with the assets `held for sale' because the treatment of such
assets is covered in Ind AS 105, Non-current Assets Held for Sale and Discontinued
Operations. AS 16 deals with accounting for items of fixed assets retired from active use
and held for sale.
In this regard, consequential changes are as follows:
(i) Paragraph 3(a) of Ind AS 16 dealing with property, plant and equipment held for
sale in accordance with Ind AS 105 has been deleted in AS 16. However, in order
to maintain consistency with paragraph numbers of Ind AS 16, the paragraph
number has been retained in AS 16.
(ii) Paragraphs 66A and 74(e) prescribing the accounting for items of property, plant
and equipment retired from active use and held for disposal and disclosure
respectively has been included in AS 16.
2. Paragraph 3(c) of Ind AS 16 dealing with recognition and measurement of exploration
and evaluation assets has been merged with paragraph 3(d) in the upgraded AS 16.
3. Ind AS 16 provides guidance on measuring `Stripping Costs in the Production Phase of a
Surface Mine'. AS 16 does not contain this guidance.
4. The definition of `property, plant and equipment' covers tangible items which are held
for use or for administrative purposes. Explanation regarding the term `administrative
purposes' has been given in AS 16 while the same is not given in Ind AS 16
5. Paragraph 28 has been deleted in Ind AS 16 since Ind AS 20, Accounting for Government
Grants and Disclosure of Government Assistance, does not permit the option of reducing
the carrying amount of an item of property, plant and equipment by the amount of
government grant received in respect of such an item, which is permitted in AS 20.
Accordingly, paragraph 28 has been added in AS 16.
6. Paragraph 26A of AS 16 provides that where several items of property, plant and
equipment are purchased for a consolidated price, the consideration is apportioned to the
various items on the basis of their respective fair values at the date of acquisition. In case
the fair values of the items acquired cannot be measured reliably, these values are
estimated on a fair basis as determined by competent valuers. However, Ind AS 16 does
not provide so.
7. AS 16 requires that if items of property, plant and equipment are stated at revalued
amounts, the following should be disclosed:
a) the methods and significant assumptions applied in estimating fair values of the
items;
b) the extent to which fair values of the items were determined directly by reference to
observable prices in an active market or recent market transactions on arm's length
terms or were estimated using other valuation techniques.
However, Ind AS 16 does not require these disclosures.
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8. Ind AS 16 requires that if items of property, plant and equipment are stated at revalued
amounts, for each revalued class of property, plant and equipment, the carrying amount
that would have been recognised had the assets been carried under the cost model should
be disclosed However, AS 16 does not require this disclosure. Accordingly, Paragraph
77(e) appear as `Deleted' in AS 16.
9. Paragraph 73(c) of AS 16 requires that in case the useful lives or the depreciation rates
used are different from those specified in the statute governing the entity, it should make
a specific mention of that fact. However, this is not required in Ind AS 16.
10. The following paragraph numbers pertaining to encouraged disclosures have not been
included in AS 16:
i. paragraph 78
ii. paragraph 79
11. The following paragraph numbers appear as `Deleted' in Ind AS 16. In order to maintain
consistency with paragraph numbers of Ind AS 16, the paragraph numbers are retained in AS 16:
(i) paragraphs 32-33
(ii) paragraph 64
(iii) paragraphs 77(c)-77(d)
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Appendix 2
Note: This Appendix is not a part of the Accounting Standard. The purpose of this Appendix is
only to bring out the major differences, if any, between Accounting Standard (AS) 10 and
Accounting Standard (AS) 16, Property, Plant and Equipment
Comparison with AS 10, Property, Plant and Equipment
1. Definitions related to agriculture given in AS 10 have been removed in AS 16 since AS
41, Agriculture would deal with the same.
2. Paragraphs 35-36, 85(c) &(d) of AS 10 pertaining to determination of fair value in case
revaluation model is adopted have not been retained in AS 16 because these aspects will
be dealt by a separate Standard, i.e., AS 113, Fair value Measurement.
3. Paragraph 42 of AS 16 provides that the effects of taxes on income, if any, resulting from
the revaluation of property, plant and equipment are recognised and disclosed in
accordance with AS 12, Income Taxes. This requirement is not there in AS 10.
4. As a result of bringing in concept of `Other Comprehensive Income' under AS 11,
Presentation of Financial Statements, any increase in revaluation surplus is required to be
recognised in Other Comprehensive Income instead of Owner's interest.
5. Encouraged disclosures given in paragraphs 86-87 of AS 10 have been removed in AS 16
for the purpose of simplification.
6. Transitional provisions given in paragraphs 88-91 of AS 10 have been removed in AS 16
since these will be incorporated in separate Standard.
7. In AS 16, guidance pertaining to changes in Existing Decommissioning, Restoration and
Similar Liabilities is given in Appendix A. However, in AS 10, paragraphs 66-69 provide
guidance on accounting for changes in Existing Decommissioning, Restoration and
Similar Liabilities. Guidance is similar under both the Standards.
1
AS1, Presentation of Financial Statements, is under formulation.
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