Ind AS 16 Notes with Examples

In this note, we will provide an overview of Ind AS 16 with examples, which deals with the accounting treatment of property, plant, and equipment, and is similar to AS 10 in its scope and requirements.

There have been recent developments in the field of accounting standards in India, particularly with the implementation of Indian Accounting Standards (Ind AS) for certain companies.

Ind AS is a set of accounting standards that is converged with the International Financial Reporting Standards (IFRS) and is mandatory for certain companies in India. Companies that meet certain criteria, such as listed companies and certain types of banks, insurance companies, and non-banking financial companies, are required to prepare their financial statements in accordance with Ind AS.

Scope of Ind AS 16

Ind AS 16 applies to all types of property, plant, and equipment, except for assets held for sale in the ordinary course of business or for disposal. The standard applies to all companies that are required to prepare their financial statements in accordance with Ind AS, as mentioned above.

The standard applies to the measurement, recognition, and disclosure of property, plant, and equipment in the financial statements of a company.

Measurement of Property, Plant, and Equipment

Ind AS 16 provides guidance on the measurement of property, plant, and equipment, which includes the cost and revaluation models. Under the cost model, property, plant, and equipment are recorded at their cost of acquisition or construction, including all incidental expenses such as installation charges and duties. The cost model also includes the cost of replacing parts or repairing the assets to maintain their operational efficiency.

The revaluation model involves the periodic revaluation of property, plant, and equipment to reflect their current market value. The revaluation model is applicable only if the fair value of the property, plant, and equipment can be determined with sufficient reliability.

Recognition of Property, Plant, and Equipment

Property, plant, and equipment are recognized in the financial statements of a company when they meet the following criteria:

• It is probable that the economic benefits associated with the asset will flow to the company, and
• The cost of the asset can be reliably measured.

The standard requires that property, plant, and equipment be recognized at cost or fair value, depending on the measurement model used. If an asset is acquired in exchange for another asset or through a non-monetary transaction, the cost of the asset is measured based on the fair value of the consideration given or received.

Depreciation of Property, Plant, and Equipment

Depreciation is the systematic allocation of the cost of property, plant, and equipment over its useful life. Ind AS 16 provides guidance on the calculation of depreciation for property, plant, and equipment, including the method of depreciation, useful life, and residual value.

The standard requires that the method of depreciation used must reflect the pattern in which the economic benefits of the asset are expected to be consumed by the company. The most common methods of depreciation include the straight-line method, the reducing balance method, and the sum-of-the-years-digits method.

The useful life of property, plant, and equipment is determined based on factors such as the expected usage of the asset, the physical wear and tear of the asset, and the technological obsolescence of the asset. The residual value of the asset is the estimated amount that the company would receive after deducting the expected costs of disposal.

Disclosure Requirements

Ind AS 16 requires companies to disclose certain information related to property, plant, and equipment in their financial statements. The disclosure requirements include:

• The measurement basis used for the property, plant, and equipment
• The depreciation method used and the useful life of the asset

Few IndAS 16 Examples for better understanding of this accounting standard.

Examples of how Ind AS 16 may be applied in different scenarios:

1. ABC Ltd, a manufacturing company, acquires a new plant and machinery for INR 1 crore. The company estimates that the useful life of the plant and machinery is 10 years and the residual value is INR 5 lakhs.

Under Ind AS 16, ABC Ltd should recognize the plant and machinery as an asset at its cost of INR 1 crore, which includes all incidental expenses related to the acquisition. The company should then calculate the annual depreciation expense based on the useful life and residual value of the asset. If ABC Ltd uses the straight-line method of depreciation, the annual depreciation expense would be INR 9.5 lakhs (INR 1 crore - INR 5 lakhs divided by 10 years).

2. XYZ Bank, a banking company, has a lease agreement for a property with a lease term of 5 years. The lease agreement requires the bank to make monthly lease payments of INR 2 lakhs to the lessor.

Under Ind AS 16, XYZ Bank should recognize the lease payments as an expense in its income statement over the lease term. The bank should also recognize a right-of-use asset in its balance sheet, which represents its right to use the property for the lease term. The initial measurement of the right-of-use asset should be the present value of the lease payments, discounted at the incremental borrowing rate of the bank.

3. PQR Ltd, a construction company, has a fleet of vehicles that it uses for its business operations. The company decides to revalue its fleet of vehicles at the end of the financial year to reflect their current market value.

Under Ind AS 16, PQR Ltd can choose to measure its fleet of vehicles using either the cost model or the revaluation model. If the company chooses to use the revaluation model, it should revalue the fleet of vehicles to its fair value at the end of the financial year. The fair value can be determined based on an independent appraisal or a market analysis. The company should then recognize any increase or decrease in the fair value of the fleet of vehicles as a revaluation gain or loss in its income statement. If the company decides to use the cost model, the vehicles would continue to be measured at their original cost, and no revaluation would be necessary.