IAS 16 - Property, Plant and Equipment

1, Definition of PPE – PPE are Tangible Items that are Held for
 Use in production or supply of goods or services
 Or Rental to others(other than L&B)
 Or for Administrative purposes

Expected to be used during more than 1 period. Tangible items have

physical substance.

2, Treatment of Land & Building (ie., Property)

Property held for -

 Use in production or supply of goods or services
 Or for Administrative purposes

-Treat it as Owner occupied property (IAS 16)

Property held for -

 Rental to Others (Operating Lease)
 Or for Capital Appreciation
 Or Undetermined use

-Treat it as Investment Property (IAS 40)

3, PPE – Rental to others (other than L&B) – IAS 16 PPE

4, PPE – Rental to others (Operating Lease) – IAS 40 Investment
Property
5, Business is giving building on Rent – Building here should be treated
as IAS 16
6, L & B gave as rent to others for running any business – L&B here
should be treated as IAS 40
7, Factory Building/ Office Building/ Building for Staff Accommodation
– IAS 16
8, L & B held for sale in ordinary course of business – IAS 2 Inventory

9, Treatment of Spare parts – eg. Bearings, Screws etc.. and stand by

equipment (eg. Fire Extinguishers)
 If it meets the definition of PPE – Apply IAS 16
 Otherwise – Treat it as Inventory under IAS -2
10, Recognition Criteria – PPE is recognized in Books only if

It is probable that FEB will flow to the entity

Cost of the Asset can be measured reliably

Initial Recognition - @ Cost

Cost Includes – Any directly attributable cost necessary to bring PPE to

location & condition intended by Management.

11, Cost Includes

Purchase price
-Trade Discount/ Rebate
+Import Duty & Purchase taxes like Entry tax, GST etc..(only if refundable)
+Property transfer tax (Only if Non-Refundable)
+Stamp Duty Cost
+Legal fee
+One time Joining fee of Building Association (if property only)
+Initial Delivery/ Transport Cost
+Other Handling Cost
+Installation & Assembling Cost
+Professional fee/ Consultant fee/ Advisor fee/ Architect fee
+Site Preparation Cost
+Building Plan Approval/ Permission Cost
+Direct Material, Labour or OH Cost on Construction
+Employment Cost of Construction Workers
+Testing Cost
+PV of Estimated Dismantling, Decommissioning, Restoration or
Demolition Cost
+Any other Directly Attributable Cost

12, Cost Excludes

 Cost of Staff Training

 Cost of Relocation of Staff/ Employees
 Cost of Opening or Inaugration Ceremony
 Advertisement Cost
 Purchase of Maintenance Contract of PPE
 Day to Day Repair & Maintenance Cost
  Administrative, General, Selling & Allocated OHs
 Cost of Abnormal amount of Wasted Material, Labour or Other
Resources (Eg. Due to Faulty design, Spoiled Material, Industrial
Site, etc..)
 Operating Losses
 Cash Discount/ Early Settlement Discount
 Interest Cost on Loan taken to buy or Construct the PPE(Unless
allowed by IAS 23)

13, Income from Incidental activities done by entity during

construction of PPE but are not necessary for its construction – Such
income will be recognized in P/L and not included in PPE Cost.

14, PPE Acquired in Exchange of Assets

If Exchange transaction has Commercial Substance

Recognize PPE acquired @ following gin priority:

FV of Asset Given up
FV of Asset Received
Carrying Amount of Asset Given up

If Exchange transaction lacks Commercial Substance

Recognize PPE acquired @ Carrying Amount of Asset Given up

Note:

i) If some cash is also paid along with the Asset to Acquire the PPE,
then
Add: Amount of cash paid in the above amount
ii) If some cash is also received along with the PPE in Exchange, then
Deduct: Amount of Cash Received from the above amount
iii) Commercial Substance means which affects Cash flows of the
entity
 15,
15, Depreciation of PPE

 Methods of Charging Depreciation – SLM/ WDV/ Units of

production method.
 Depreciation of PPE begins when Asset is available for us – (Ready
to use condition)
 Depreciation of Asset Ceases when PPE is – De-Recognized (ie,
sold) or Classified as HFS.
``
 Depreciation of PPE consisting of Land & Building both
 Land Cost – No Depreciation will be charged
 On Building Cost – Depreciation will be charges as its useful life is
Limited
 If there is a Change in Depreciation Method/ useful life/ RV – it is a
change in Accounting Estimate – also prospective effect will be
given in Remaining future period.

16, Component Accounting - Part of PPE which has Significant Cost must
be Depreciated Seperately. If Part having Significant Cost has same
useful life as of PPE, then no need to depreciate it seperately.

17, Replacement of Significant Part - If Part having Significant Cost is

replaced, then

Cost of New part is added to CA of PPE &

CA of old Part is Derecognized from CA of PPE
New CA = CA of PPE on past Replacement Date + Cost of New Part – CA
of Old Part on part Replacement date.

Note: If CA of Old part on Replacement Date is not given in Questions,

then calculate it in following steps:

Step 1: Take cost of New Part

Step 2: PV it to the date of installation of Old Part (It is treated as cost of
old part)
Step 3: Deduct Depreciation on above amount up to part replacement
date
Subsequent Recognition of PPE (@ each B/S Date)

PPE will shown at either Cost Model or Revaluation Model

Choose Accounting Policy (ie., Cost Model or Revaluation Model) will
apply to entire class of PPE
Note: Class of PPE means Group of Assets having similar Nature & Use

18, Cost Model:

CA = Cost – Accum. Depreciation – Accum. Impairment Loss

19, Revaluation Model:

CA = FV @ Date of Revaluation
Depreciation will be charged on this revalued amount in future
Increase in Revaluation Value – OCI & Revaluation Surplus
Decrease in Revaluation Gain – P/L & Revaluation Deficit.

20, Disposal of PPE/ De – Recognition

When PPE is classified as HFS whole Revaluation surplus balance is

transferred to RE
Some of the Revaluation Surplus may also be transferred to RE during
the Asset is used by entity (It is optional)
Note: Revaluation surplus (OCI) is item cannot be reclassified to P/L.
Gain/ Loss on Sale of PPE is recorded in P/L

21, Compensation Receivable from Insurance Company due to damage

in PPE is accounted for seperately as other Income in P/L.

IAS 38 – Intangible Assets

1, Definition – Intangible Assets are defined as “Identifiable Non-

monetary assets without Physical Substance”.

Existence of Future Economic Benefits & entity has control over these
FEB. Control over FEB means – Power to obtain those benefits & Ability
to restrict others to access those benefits.

2, Examples – GW acquired in business combination, Computer

Software, Patents, Copyrights, Motion picture films, Customer list,
Mortgage servicing rights, Licenses, Import quotas, Franchises, Customer
and Supplier relationships, Marketing rights, etc…

3, Exclusions

Market share – since it is not identifiable

Marketing & Advertising Campaign (promotional activity) since FEB are
not certain.
Staff Training Programme – since entity has no control over the staff as
they can resign anytime.
[But if there is some restriction like recruited person have to work for
atleast sometime, then it will be Intangible Asset]

4, Recognition Criteria – Entity should recognize Intangible Asset if all

the following criteria are met:

The Asset is Identifiable

The Asset is controlled by the entity
The Asset will generate future economic benefits for the entity
The cost of the asset can be measured reliably
5, Identifiability - An Intangible Asset is said to be identifiable if it is
Separable or it arises from contractual or other legal rights/obligations.

6, If Recognition criteria not satisfied – expenditure should be charged

to P/L as it is incurred and it cannot be capitalized at a later date.

7, Initial Measurement - @Cost

Cost includes any directly attributable costs necessary to bring Intangible
Asset to condition intended by management

8, Cost Includes

Purchase price
-Trade Discount/ Rebate
+Import Duty & Purchase taxes like Entry tax, GST etc..(only if refundable)
+Property transfer tax (Only if Non-Refundable)
+Legal fee
+Professional fee/ Consultant fee/ Advisor fee/ Architect fee
+Customization cost
+Building Plan Approval/ Permission Cost
+Testing cost
+Employment Cost of Construction Workers
+Any other development phase expenses
+Any other Directly Attributable Cost

9, Cost Excludes

 Cost of Staff Training

 Cost of conducting conference for introduction/ Launch of
Intangible Asset.
 Cost of Advertisement/ Promotion
 Preliminary expenses
 Purchase of Maintenance Contract of PPE
 Administrative, General, Selling & Allocated OHs
 Operating Losses
 Purchase of Maintenance Contract of Intangible Asset.
 Subsequent cost on Intangible Asset. (Annual fee/ Royalty)
 Cash Discount/ Early Settlement Discount
 Interest Cost on Loan taken to buy or Construct the PPE(Unless
allowed by IAS 23)
  Research phase expense.

10, Cost Model:

CA = Cost – Accum. Amortization – Accum. Impairment Loss

11, Revaluation Model:

CA = FV @ Date of Revaluation
Depreciation will be charged on this revalued amount in future
Increase in Revaluation Value – OCI & Revaluation Surplus
Decrease in Revaluation Gain – P/L & Revaluation Deficit.

12, Research Phase – Planned investigation to gain New Knowledge

Expense made during Research phase is not Recognized as Intangible
Asset.

13, Development Phase – Application of Research finding to develop

Intangible Asset.

It starts after establishment of Technical feasibility and Regular approval

Conditions:
 The Project is Technically feasible
 The entity intends to complete the Intangible Asset and then use
it or sell it
  The Intangible Asset will generate future economic benefits
 It has adequate resources to complete the project
 It can reliably measure the expenditure on project

14, Intangible Assets but still not recognized as Intangible Assets:

Internally generated brands, Mastheads, publishing titles, customer lists,
GW - are not Recognized as Intangible as they are internally generated.

15, Research project – expense on Research phase is acquired in a

business combination, then it is recognized as Intangible Asset @ Fair
value.

16, Amortization of Intangible Assets:

 Methods of Charging Amortization – SLM/ WDV/ Units of

production method.
 Amortization of IA begins when Asset is available for us – (Ready
to use condition)
 Amortization of Asset Ceases when IA is – De-Recognized (ie, sold)
or Classified as HFS.
 If there is a Change in Amortization Method/ useful life/ RV – it is
a change in Accounting Estimate – also prospective effect will be
given in Remaining future period.
 An asset with a finite useful life must be amortised on a
systematic basis over that life.
 An asset has an indefinite useful life when there is no foreseeable
limit to the period over which the asset is expected to generate
net cash inflows. It should not be amortised, but be subject to an
annual impairment review.

17, Impairment of Intangible Assets:

Intangible Assets whether Finite or Infinite must be tested for

impairment annually.

18, Disclosure:

 The Amortization methods used

 For IAs assessed as having an indefinite useful life, the reasons
supporting the assessment.
  The date of any Revaluations, if applicable as well as methods and
assumptions used.
 A Reconciliation of CA of Intangibles @ beginning and end of the
period.

IAS 23 – Borrowing Costs

1, Definition: Interest & Other Costs incurred by the entity in connection

with borrowing of funds.

2, Recognition – Borrowing costs should be capitalized if they relate to

Acquisition, Construction or Production of qualifying Asset.

3. Qualifying Asset – Asset that takes substantial period of time to get

ready for its intended use or sale.

4, Capitalization Period – Borrowing costs should only be capitalized

while construction is in progress.

5, Commencement of Capitalization of Borrowing Costs – Capitalization

of BC should commence when all the following apply:

- Expenditure for the asset is being incurred

- BC are being incurred
- Activities that are necessary to get the asset ready for use are in
progress.
6, Cessation of Capitalization - Capitalization of BC should cease when
substantially all the activities that are necessary to get the asset ready
for use are compete.

7, Suspension of Capitalization - BC should be suspended during

extended periods in which active development is interrupted.

8, Specific and General Borrowings –

Specific Borrowings – When loan is taken out specifically to finance the

construction of an Asset – Amount capitalized will be
Interest Payable on Loan = XXX
Less: Income earned on the temporary invest. of the borrowings = (xxx)
Amount to be capitalized = XXX

General Borrowings - If construction of a qualifying asset is financed from an

entity's general borrowings, the borrowing costs eligible to be capitalised are
determined by applying the weighted average general borrowings rate to the
expenditure incurred on the asset.

Capitalization of BC by Group companies:

Single FIS –

Consolidated F/S -

Exchange difference on foreign currency borrowing should be treated

as Borrowing costs -
 IAS 20 – Government Grants

1, Definition of Govt. Grants – Monetary or Non - Monetary benefits

provided by the Government to the entity with or without conditions
attached.

Excludes - It excludes assistance that cannot be valued & Normal trade

with Governments.

2, Government Assistance – is government action designed to provide

an economic benefit to a specific entity.

It does not include indirect help such as infrastructure development.

3, Recognition – Government grants should only be recognized only

when below conditions are satisfied:

 Conditions attached to the grant are satisfied &

 It is probable that the grant will be received (reasonable assurance)

4, Grants related to Assets / Depreciable Assets – It means grant given

by government for purchase/ constriction of Long term Assets:

Accounting for GG related to Asset received/ receivable in Cash

[Monetary Grant]:
5, Non-Monetary GG received by Entity@ Nominal value (paid/ free)/
Depreciable Asset/ Non-depreciable Asset (Conditional/Un-Conditional
Grant):

6, Accounting for GG received/ receivable for

 Expenses already incurred (un conditional)
 For future expenses (conditional)
7, Repayments

8, Income based Grants

 Income grants given to subsidise expenditure should be matched to the

related costs

 Income grants given to help achieve a non-financial goal (such as job

creation) should be matched to the costs incurred to meet that goal.

 Repayment - Firstly, debit the repayment to any liability for deferred

income. Any excess repayment must be charged to profits immediately

9, Capital based Grants

Grants for purchases of non-current assets should be recognised over the

expected useful lives of the related assets. IAS 20 provides two acceptable
accounting policies for this:

 deduct the grant from the cost of the asset and depreciate the net cost
 treat the grant as deferred income and release to profit or loss over the
life of the asset.

Repayment - Capital-based grants deducted from cost

Increase the cost of the asset with the repayment. This will also increase
the amount of depreciation that should have been charged in the past.
This should be recognised and charged immediately
Repayment - Capital-based grants treated as deferred income

Firstly, debit the repayment to any liability for deferred income. Any excess
Repayment must be charged against profits immediately

10, Presentation in Financials

B/S – Deferred Grant is shown as Liability (Current / Noncurrent)

P/L -
Option 1 – Grant Income is shown seperately in “other Income”
Option 2 – Grant Income is deducted from the related Expense.

Statement of Cash Flows – Grant received is shown under Financing

activities.

IAS 40 – Investment Property

1, Definition – Property L/B held by owner or by the lessee as a ROU-

Asset to earn Rentals or for capital appreciation or both.

2, Examples:

 Land held for Capital Appreciation

 Land held for undecided future use
 Buildings leased out under an operating lease
 Vacant buildings held to be leased out under an operating lease

3, Exclusions:

 Property held for use in Prod./ supply of goods/services or for

Administrative purposes (IAS 16)
 Property held for sale in ordinary course of business (IAS 2)
 Property being constructed or developed on behalf of 3rd parties
(IFRS 15)
 Owner occupied property (IAS 16)
 Property leased to another entity under Finance lease (IFRS 16)
4, Recognition Criteria

 Probable that Future economic benefits will flow to the entity &
 Cost of the assets can be measured reliably

5, Initial Recognition - @ Cost

6, Subsequent Recognition - @ Cost model or FV model

Cost Model – If cost model is chosen then must be computed @

Cost less Accum Depreciation

FV Model – Under FV model entity remeasures its investment properties

to FV each year. No Depreciation is charged. All gains and Losses on
Revaluation are reported in P/L. In rare cases if entity is unable to
measure FV of an Investment property then Cost model should be
adopted.

7, Property held for more than 1 purpose

8, Property given on Lease/ Rental to Subsidary Co. by its Parent Co. or
Vice versa.

9, Transfer of Change in Use

(Cost model) Inv. Prop to PPE

(Cost model) Inv. Prop to Inventory

(FV model) Inv. Prop to PPE

(FV model) Inv. Prop to Inventory

(Cost model) PPE to Inv. Prop (Cost model)

(Cost model) PPE to Inv. Prop (FV model)

Inventory to Inv. Prop (Cost model)

Inventory to Inv. Prop (FV model)

10, Disposal of Investment property

11, Compensation from 3rd parties on damage of Investment property

 IAS 36 – Impairment of Assets

1, Definition - Impairment is a reduction in the recoverable amount of

an asset or CGU below its carrying amount.

2, Difference between impairment and Depreciation

Impairment is usually a sudden loss in value. It can result from

unexpected sources like a market crash or natural disaster. Depreciation
is an expected loss in market value due to normal wear and tear. For
example, a car naturally depreciates once it's driven off the lot.

3, Indications of Impairment

Internal Sources of Information

 Evidence of obsolescence or damage

 (there is or about to be)Material reduction in usage of asset
 Evidence that the economic performance of an asset is worse than
expected.

External sources of Information

 Significant adverse changes in PESTLE

 Un expected decreases in an assets Market value
 Entity’s net assets are measured @more than its market
capitalization
 Increased interest rates have decreased an assets recoverable
amount

4, Calculation of Impairment loss

An impairment occurs if the carrying amount of an asset is greater than its

recoverable amount.

Recoverable amount is the higher of fair value less costs to sell and
value in use.

Value in use is calculated by estimating future cash inflows and outflows from
the use of the asset and its ultimate disposal, and applying a suitable discount
rate to these cash flows.
Costs to sell are incremental costs directly attributable to the disposal of an
asset.

5, Recognizing Impairment losses in Financial statements:

 Impairment loss – charged to P/L

 In case if Rev surplus exist due to previous Rev increase then Imp
loss should be first adjusted with that Rev gain in OCI and balance
should be posted to P/L.

6, Cash Generating Units

A Cash Generating Unit is the smallest group of assets that generates

independent cash flows

7, Allocating assets to CGUs:

Corporate assets and goodwill should be allocated to cash-generating

units on a reasonable and consistent basis. A cash-generating unit to
which goodwill has been allocated must be tested for impairment
annually.
If an impairment loss arises in respect of a cash-generating unit, IAS 36
requires that it is allocated among the assets in the following order:

 Goodwill
 Other assets in proportion of their CA

8, Reversal of an impairment loss

 Impaired assets should be reviewed at each reporting date to see

whether there are indications that the impairment has reversed.

 The reversal must not take the value of the asset above the
amount it would have been if the original impairment had never
been recorded. The depreciation that would have been charged in
the meantime must be taken into account.

 An impairment loss recognised for goodwill cannot be reversed in

a subsequent period.

9, Applicability of IAS 36 - Impairment of Assets

10, Revised Carrying Amount

 IFRS 5 – Non Current Assets held for sale & Discontinued operations

1, Definition - Non-current asset or disposal group should be classified

as ‘held for sale’ if its carrying amount will be recovered primarily
through a sale transaction rather than through continuing use.

2, Disposal Group – is a group of Assets that the entity intends to

dispose of in a single transaction.

3, Abandoned or wounded Assets - Assets that are to be abandoned or

wound down gradually cannot be classified as held for sale because their
carrying amounts will not be recovered principally through a sale
transaction.

4, Classification as Held for Sale:

 The item is available for immediate sale

 The sale is highly probable
 Management is committed to a plan to sell the item
 An active programme to locate a buyer has been initiated
 The item is actively marketed @resonable price in relation to its
current FV.
 The sale is expected to be completed within 1 year from the date
of classification
 It is unlikely that the plan will change significantly or be withdrawn.

5, Measurement of Assets or Disposal groups HFS:

6, Changes to a plan of Sale:

If a sale does not take place within one year, IFRS 5 says that an asset (or
disposal group) can still be classified as held for sale if:

 the delay has been caused by events or circumstances beyond the

entity’s control
 there is sufficient evidence that the entity is still committed to the
sale.

7, If criteria for HFS not met:

If the criteria for ‘held for sale’ are no longer met, then the entity must
cease to classify the assets or disposal group as held for sale. The assets
or disposal group must be measured at the lower of:

 'its carrying amount before it was classified as held for sale

adjusted for any depreciation, amortisation or revaluations that
would have been recognised had it not been classified as held for
sale.
 its recoverable amount at the date of the subsequent decision not
to sell'

8, Presentation:

IFRS 5 states that assets classified as held for sale should be presented
separately from other assets in the statement of financial position.

The liabilities of a disposal group classified as held for sale should be

presented separately from other liabilities in the statement of financial
position.

The major classes of assets and liabilities classified as held for sale must
be separately disclosed either on the face of the statement of financial
position or in the notes.
9, Non Adjusting events:

Where an asset or disposal group is classified as held for sale after the
reporting date, but before the issue of the financial statements, details
should be disclosed in the notes (this is a non-adjusting event after the
reporting period).