Property, Plant and Equipment
1. Executive Summary
1.1 Exposure draft of this Standard was titled as Tangible Fixed Assets, and was issued with a revised title to be in line with IAS 16. The Standard combines the subjects of accounting for Tangible Assets including accounting for depreciation. The Standard on Depreciation (AS 6) has therefore been withdrawn. Items of Property, Plant and Equipment (PPE) are long-term assets held by an entity for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and when these are expected to be used for more than one period. The cost of an item of PPE is recognised as an asset only and only if the entity derives economic benefits from it, and expects to use it for more than one period. The cost can be allocated to a major component part, and treated as a separate asset, if its life were to differ from the main asset. Spare parts, if this qualify to be recognised as an asset, can also be recognised as PPE if the usage is for more than one period.
1.2 Items of PPE are grouped under different classes. These are then carried at cost less accumulated depreciation (Cost Model). Alternatively where the fair value of such assets can be measured reliably, an enterprise can also carry the assets at revalued amounts (Revaluation Model).
1.3 Items of PPE are depreciated beginning from when they are available for use until derecognised, even if it is idle during a part of that period. Depreciation is allocated to each accounting period, on a systematic basis over the useful lives of respective PPEs (or major stores). The residual value, useful lives of assets, and the method of depreciation adopted – all, should be reviewed at each financial year-end, and changes if any are accounted for on a prospective basis as these are accounting estimates. When an item of PPE is disposed, or when no future economic benefit is expected from its use, it is derecognised, and the resulting gain or loss is recognised in the statement of profit and loss.
1.4 An enterprise should disclose, significant accounting policies relating to Property, Plant and Equipment, methods of depreciation and measurement bases used, together with a reconciliation of gross carrying amount, accumulated depreciation and accumulated impairment loss to reflect the changes in such amounts at the beginning and at the end of a period.
2. Applicability
This Standard is fully and completely applicable to All SMCs, and Level I and II entities in non-corporate category. However, there are some disclosure exemptions for Level III and Level IV non-corporates, explained at the appropriate place. The Standard is operative for all accounting periods commencing on or after 1st April 2021.
3. Principles of Recognition
3.1 Recognition: Property, Property, plant and equipment are defined as tangible items that are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and are expected to be used during more than a period of twelve months. The dominant characteristic is its physical substance, because its value lies in the physical substance. By incorporating phrases such as ‘assets held for rental to others or for administrative purposes’ and ‘assets that are expected to be used during more than one period’, the Standard explains the life and usage of assets for purposes other than production of goods or provision of services. The cost for an item of PPE can be recognised if and only if, the entity derives economic benefits from the asset and the cost itself can be measured reliably – and this is in conformity the recognition principles in the Framework.
3.2 Cost: PPE is initially recognised at its cost. Cost, in this context, represents cost of acquisition or construction, and other expenses 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. An element of cost newly introduced is the initial estimate of costs of dismantling, removing the item and restoring the site on which it is located, referred to as ‘decommissioning, restoration and similar liabilities’. These costs represent the estimation of future obligations involving cash outflows, 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. Fair Value principles apply where an asset is acquired in exchange for other non-monetary asset(s), or for a combination of monetary and non-monetary assets. An entity must stop capitalisation of cost, when the asset is ready for its intended use.
3.3 Accounting Separation of Major Components: In certain circumstances, for improved accounting, the aggregate cost of an asset can be allocated to its major component parts if the useful life of major component parts differs from the asset itself. In such cases, the cost of major component parts is treated separately as an independent asset. Costs incurred towards major inspections or overhauls carried out periodically can be either included in the carrying amount of respective assets or charged as expense in the statement of profit and loss, subject to the overriding principle of consistency. Similarly major spare parts also qualify to be recognised as an asset, provided recognition condition is satisfied.
3.4 Major Inspection and Overhaul Costs: Where entities perform regular inspections for faults or overhauls, the relative costs can be added to cost of the PPE asset, provided the recognition criteria are satisfied. Any remaining carrying amount of the cost of the previous inspection (as distinct from physical parts) is derecognised, by adopting either replacement cost, or estimated cost of future repairs, as the basis.
3.5 Subsequent Costs: Are added to the cost of assets, if the definition conditions are met – and the earlier concept of incremental benefits arising from subsequent costs, has been given up.
4. Accounting after initial recognition
4.1 Cost vs. Revaluation model: An enterprise should carry each class of assets at cost less accumulated depreciation (Cost Model). Alternatively where the fair value of such assets can be measured reliably, an enterprise can also carry the assets at revalued amounts (Revaluation Model). As in the past, revaluation is done for a class of assets, and be done at reasonable frequency (say once in three years). In rare situations where, fair value is not readily available, an income or depreciated replacement cost approach can be adopted. The accumulated depreciation is either eliminated against gross carrying amount or is restated proportionately to revalued amount. Selective revaluation is not permitted. The accounting treatment of surplus (or deficit) arising from revaluation remains unchanged from the past.
5. Depreciation
5.1 Depreciation of an Asset – or each major component thereof that is treated as separate asset – commences when the asset is ready for use. Different methods of depreciation can be adopted, e.g. straight line, WDV, or units of production method, but the method adopted should reflect the pattern in which economic benefits are expected to be consumed by the entity. The depreciation charge for each period should be recognised in P&L, unless it is included in the carrying amount of another asset. The depreciable amount (computed as per RV and useful life) 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. This review may throw up some changes from earlier estimates. Such a change is accounted for prospectively as a change in accounting estimate as per AS 5. (Earlier prescription in AS 6 that the effect of a change in depreciation method is computed on retrospective basis but is recognised in the year of change – this is no longer valid). In some circumstances, RV of an asset may increase to an amount equal to or greater than its carrying amount. Should this happen, there would be no deprecation charge. Depreciation of an asset ceases when the asset is retired from active use, or is otherwise derecognised – the earlier of the two situations should be considered.
5.2 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. The Standard lays down detailed guidelines as to how these changes are accounted for. In making any of the adjustments relating to depreciation, the entity should bear in mind the need to assess – each financial year – if there is any indication of impairment and should there be an impairment, requiring adjustment of depreciation rate or amount, this should be done (for a detailed analysis, see AS 28 Impairment of Assets). Compensation for impairment loss, if any, is recognised in P&L when it is receivable.
5.3 An item of PPE retired from active use and held for sale is stated at lower of its carrying amount and NRV. If there is a write-down, such reductions are recognised immediately in P&L. When the entity (a) disposes of an asset, or (b) determines that no future benefit is expected to arise thereafter, the asset should be derecognised.
6. Derecognition
The carrying amount of an item of property, plant and equipment should be derecognised, and the resulting gain or loss – determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item – is recognised in P&L.
7. Disclosures
The Standard prescribes elaborate disclosure requirements. These include, but are not limited to, measurement bases, useful lives, RV, a reconciliation between opening and closing carrying amounts of each class of assets, depreciation recognised in P&L, and in other assets, restrictions on title to the property, PPE under construction, revaluation etc. These are dealt with separately.
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