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Educational material on Ind AS 16,

Property, Plant and Equipment
The Institute of Chartered Accountants of India (ICAI), on 14 August
2017, issued educational material on Ind AS 16, which summarises the
key requirements in Ind AS 16 and accounting issues that are expected
to arise while implementing Ind AS 16 in the form of Frequently Asked
Questions (FAQs). Key clarifications provided in the FAQs on significant
implementation issues are as follows:
Recognition
This article aims to
–– Summarise the guidance provided by • Assets not considered to be material: Ind AS 16 does not prescribe
the educational material on Ind AS 16 on the unit of measure for recognition of assets, and entities need
key topics.
to exercise judgement when applying the recognition criteria to
Property, Plant and Equipment (PPE). Accordingly, ICAI clarified that
entities should determine whether an individual item is insignificant
and may not be recognised as PPE based on a careful assessment
of facts and circumstances including consideration of materiality.
Consequently, individual assets below a certain threshold determined
by management may not be recognised as PPE, or be fully depreciated
in the year of acquisition, provided their cumulative aggregate cost for
that category of asset is not material.
• Capitalisation and depreciation of spares: The ICAI clarified that
machinery spares that are held for use in the production of goods
and are expected to be used for more than one period meet the
definition of PPE. Therefore, such spares should be capitalised as
PPE, irrespective of whether they have been procured at the time of
purchase of the equipment or subsequently. However, where spares
are not expected to be used for more than one annual period, although
they may be used in two financial years, they would not meet the
criteria for capitalisation as PPE.
• Expenses incurred for aesthetic purposes: Tangible items purchased
for aesthetic purposes (such as paintings and sculptures at
entrance hall and conference rooms), are considered to be held for
administrative purposes. Items held for administrative purposes qualify
as PPE as per the definition in Ind AS 16. If these items are expected to
be used during more than one period, then they should be capitalised
as PPE.
The ICAI further clarified that where an entity holds a rare piece of art or
antique paintings that are protected by legal or contractual rights such
as copyrights (e.g. signature of painter), it should evaluate whether
such items are tangible or intangible assets. Where it is probable that
the future economic benefits are expected to be derived from the
intangible element, such items may be capitalised and disclosed as a
separate class of intangible asset.

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 20

• Assets with an intangible Initial measurement intends to demolish the building

element: Where an entity after acquisition. The existing
• Expenditure incurred by an entity
procures tangible assets with building would not be utilised
to obtain regulatory permission
an intangible element (e.g. for any of the entity’s business
to set-up a factory: The ICAI
procurement of technical know- activities. The ICAI clarified that
clarified that such expenses
how for designing and installation in this situation, the entity should
should be capitalised in the cost
of a plant), it should exercise capitalise the amount paid for the
of the factory building if these are
judgement to determine which building in the cost of the land
directly attributable to bringing
element of the asset is more (irrespective of the fact that the
the factory building to the location
significant - the PPE or the fair values of land and building are
and condition necessary for use
intangible element. Where the available separately).
and if management considers
intangible element is integral
it probable that the relevant • Interruption in construction
to the larger asset, it should be
permission will be granted. of building: The ICAI clarified
capitalised as PPE as a directly
Else, these expenses should be that when construction of a
attributable cost of acquisition
charged to the statement of profit building is interrupted due
or construction of the asset.
and loss and cannot be capitalised to abnormal delays, such as
However, if the intangible part is
subsequently. protests by farmers for additional
a separate asset in its own right,
compensation for an indefinite
it should be capitalised as an • Expenses incurred for welfare of
period, then costs incurred during
intangible asset. employees: The ICAI considered
the period of interruption should
a situation where an entity has
• Consumables used in the process not be capitalised. This is because
incurred non-obligatory expenses
of manufacture: The ICAI analysed the interruption is not in a nature
to construct/develop a tangible
the classification of process of a temporary delay and not a
asset, e.g. a school (over which
chemicals or consumables used in necessary part of the process of
it does not have ownership
the process of manufacturing, e.g. bringing the asset to the location
rights) close to its refinery. The
catalysts used to manufacture and condition necessary for its
school is available for use by
chemicals. It clarified that the intended use.
its employees and the general
classification of catalysts used
public. The ICAI clarified that • Accounting for demurrage:
in the process of manufacturing,
such expenditure would not be Demurrage generally represents
as PPE or inventory, would
considered directly attributable to an abnormal cost and hence,
depend on whether they facilitate
bringing the refinery to its working should not be included as an
the process of manufacture or
condition for its intended use. element of cost of PPE. The
are consumed in the process.
Therefore, the expense incurred ICAI, therefore, clarified that
Accordingly, following situations
on developing the school should demurrage incurred on account of
summarise the accounting:
not be capitalised as PPE. a nationwide transporters strike,
–– Catalyst facilitates the represented an abnormal cost,
• Cancellation fees on contract:
manufacturing process: If a and should not be capitalised to
Entities may pay penalties or
catalyst with a life (or charge) of determine the cost of imported
cancellation fees for terminating
more than one year facilitates PPE. However, incurrence of
a contract to procure PPE from
the manufacturing process, demurrage may sometimes
one vendor, and instead procure
such that it can be reused, then represent a normal cost
it from another. The ICAI clarified
it is considered to increase considering the specific facts and
that such penalties or cancellation
the future economic benefits circumstances of the case.
fees are not directly attributable
and output efficiency of the
to bringing the asset to the • Discounts and rebates on PPE:
plant. It would accordingly be
location and condition necessary Ind AS 16 requires trade discounts
capitalised as PPE.
for it to be capable of operation and rebates to be reduced from
–– Catalyst is consumed in the in the manner intended by the cost of PPE. The ICAI has
manufacturing process: If a management. Hence, these costs clarified that it does not matter
catalyst with a life (or charge) should not be capitalised as PPE. whether such discounts or
of more than one year is in rebates are received from the
• Acquisition of land with an
the nature of a supply to be vendor directly or indirectly
existing building: Ind AS 16
consumed in the production through a broker. For example,
states that land and buildings
process, it is considered commission passed on by a
are separable assets and are
as a consumable. It would broker to induce an entity to
accounted for separately, even
accordingly be classified as an purchase an item of PPE would
when they are acquired together.
inventory. be in the nature of trade discounts
In this context, ICAI considered a
and rebates received by the entity,
scenario where an entity acquires
which is deducted from the cost
land with an existing building, and
of acquisition of the item.

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 21

Component accounting lease and owned assets of Hence, these liquidated damages
similar nature and use should be should not be deducted from the
Major periodic inspection and
classified as one class of assets cost of the related PPE.
repairs: Certain items of PPE may be
and revaluation principles would
required to undergo major periodic • Liquidated damages for
apply to the entire class of assets.
inspections and repairs, e.g. ships construction delays by contractor:
need to undergo dry docking at an The treatment of liquidated
Depreciation
interval of three years as per statute. damages received on delays in
The cost of major inspections and • Useful life of PPE: The ICAI completion of construction by the
replacements of parts should be clarified that determination of contractor depends on the facts
recognised in the carrying amount useful life and residual value of and circumstances:
of the PPE if the recognition criteria PPE is a matter of judgement and
–– Liquidated damages are directly
are satisfied. In the example above, may be decided on a case to case
identifiable with the project and
the entity should account for the dry basis. If an entity has adequate
mitigate extra project costs to
docking cost as below: internal technical expertise, it may
be incurred by the entity would
be appropriate for it to rely on the
• Cost of replacing parts: If the be capitalised as part of the
judgement of internal experts.
costs of replacing parts meets the cost of the asset.
Such advice should be supported
recognition criteria in Ind AS 16,
by adequate documentation –– Other liquidated damages
the entity should capitalise those
including the criteria and should be recognised as
parts in the carrying amount of the
assumptions involved in making income.
ship as a separate component and
the determination of useful lives
derecognise the replaced parts.
and residual value. Enabling assets
These parts will be depreciated
over their useful life, i.e. three • Depreciation on spares: Ind AS • The ICAI clarified that the
years. 16 states that depreciation of an construction cost of enabling
asset begins when it is available assets e.g. railway siding, road
• Major inspection costs: Major
for use, and does not cease and bridge constructed by an
inspection costs should also be
when the asset becomes idle or entity to facilitate construction
recognised in the carrying amount
is retired from active use unless of a main plant (e.g. refinery),
of the ship and be depreciated
the asset is fully depreciated. should be considered as the cost
over the period remaining until the
Accordingly, the ICAI clarified that of construction of the refinery.
next dry-docking.
depreciation on spares recognised Accordingly, expenditure incurred
as PPE should begin from the date on enabling assets should be
Revaluation
of their purchase. allocated and capitalised as part of
• Revaluation on business the PPE. Though the entity cannot
combination: Ind AS 103, Liquidated damages restrict the access of others from
Business Combinations requires using the enabling assets, the
• Liquidated damages payable
an entity acquiring another entity reason for capitalisation of these
subsequent to commissioning of
to measure the identifiable items is that they are incurred
plant: An entity may be entitled to
assets acquired and the liabilities in order to get future economic
receive liquidated damages for a
assumed at their acquisition-date benefits from the project as a
construction contractor’s failure
fair values. The ICAI clarified that whole. Therefore, the project as
to meet performance conditions
the fair value measurement of a whole can be considered as the
in terms of the desired quality
assets acquired is just an initial unit of measure for the purpose of
and level of output subsequent
recognition of the asset at cost capitalisation of the expenditure
to commissioning of a plant. The
by the acquirer and does not on enabling assets.
ICAI clarified that such liquidated
tantamount to adoption of a
damages arise as a result of
revaluation model for existing
inefficiencies on the part of the
assets within the same class.
contractor and are directly linked
• Revaluation of assets under to performance parameters
finance lease: The ICAI clarified for the plant subsequent to
that assets held under a finance commissioning of the plant.

© 2017 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
 Accounting and Auditing Update - Issue no. 14/2017 22

© 2017 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.