Under the Indian accounting system, specific provisions are also made for accounting of property, plant and equipment (PPE). These provisions are standardised under the Indian accounting standard 16, more popularly known in its abbreviated form, Ind AS 16.

Applicability and scope of Ind AS 16

Unless other accounting standards ask for a different treatment, Ind AS 16 is applicable to all property and plant and equipment.

This standard is not applicable in the below mentioned cases:

• Property and plant and equipment classified as held for sale as per Ind AS 105.
• Biological assets related to agricultural activities, except bearer plants.
• The recognition and measurement of exploration and evaluation assets.
• Mineral rights and reserves and other non-regenerative resources.

See also: All about Indian accounting standards (Ind AS)

Cost of assets and its constituents under Ind AS 16

The standard also specifies that the cost of all PPE Assets would be considered as assets, only when the cost is reliably measurable and it is obvious that the monetary benefits of such assets would benefit the business. The cost of the PPE items include:

• The purchase price, including the import duty and other non-refundable taxes, after deducting rebates and trade discounts.
• Expenses made towards bringing the assets to the condition and location essential for it to operate.
• Initial estimate cost for dismantling/removing an item and restoring the site where it is located.

See also: All about Ind AS 116

Measurement after recognition of PPE under Ind AS 16

Companies can choose between the revaluation model and the cost model, as their accounting policy and apply the same to their entire class of PPE. Under the cost model, the PPE should be carried at the cost as reduced by the accumulated Depreciation and accumulated impairment losses, if any. Under the revaluation model, the PPE for which the fair value can be reliably measured, should be carried at the revalued amount, which is the fair value on its revaluation date and reduced by successively accumulated depreciation and accumulated impairment losses, if any.

Depreciation under Ind As 16

For each accounting period, companies have to systematically allocate the depreciable amount of depreciable assets during the useful life of the asset. Every part of a PPE, which has a cost that is significant, with respect to the total cost of the item, must be depreciated separately. The standard also establishes that depreciation must be charged to each accounting period, based on the depreciable amount, even if there has been an increase in the value of an asset over time. Companies have to start depreciating all items of PPE until they are derecognised after their useful life. They have to do so, even if these items are lying unused during the period that is classified as their useful period. Also note that the useful life of an asset has to be reviewed at the end of every financial year. Any changes should be disclosed, in the accounting period during which the change takes place.

Factors that should be considered when estimating the useful life of a depreciable asset, are the expected wear and tear, the obsolescence and the legal or other limits on the use of the assets.

Also read: What is depreciation of property

Methods of charging depreciation under Ind AS 16

These include the straight line method, the reducing balance method, the sum-of-the digits method and the machine hour method. However, once a company selects a particular method, they have to stick with it consistently, unless they could justify a change. At the time of a change, companies have to clarify the reason behind this.

Derecognition under Ind AS 16

Companies are also required to derecognise the carrying amount of an item of property, plant or equipment that it disposes. This should be done:

• At the time of its disposal.
• When no future monetary benefits are expected from the use or disposal of such an asset.

Companies have to include the gains or losses incurred from such derecognition in the (profit and loss) P/L statements. Note here that gains earned through the disposal of such items cannot be classified as revenue.

Ind-AS 16 disclosure requirements

For every class of PPE, financial statements should disclose the following, according to Ind AS 16:

• Measurement basis for determining carrying amount.
• Depreciation methods.
• Depreciation rates.
• Property, plant and equipment that is pledged as security towards liabilities.
• Aggregate carrying amount and accrued depreciation at the beginning and end of the period.
• Existence and value of restrictions on the title and PPE that is pledged as collateral towards liabilities.
• Amount of expenses recognised in carrying an amount of an item of PPE during its construction.
• Amount towards contractual commitment, for acquisition of the PPE.
• Amount of compensation from third parties for PPE items.

Note: Land has an unlimited useful life and is, thus, not depreciated. Buildings, however, have a limited useful life and are depreciable assets. Where land has limited useful life like in case of landfill sites, mines and quarries, it is depreciated.

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