Indian Accounting Standards

CMA Final

CFR

Final Push Series

Book let

Ind AS 16

Sanjay Welkins

Sanjay Welkins Classes - SWC

44
Ind AS 16 - PPE

CFR Final Push

Revisionary Session - 24

Ind AS 16

Property, Plant and Equipment

Preface:
It’s a strong standard but also similar to Existing Standard AS 10.

1.Principal Issues addressed by this standard are:

i. Recognition of assets
ii. Determination of their carrying amount
iii. Determination of Depreciation charges
iv. Determination of Impairment losses

2. Scope
Standard should be applied in accounting for Property and Plant & Equipment unless and until any
other accounting standard asks for a different treatment.
Ind AS 16 Property Plant Equipment is not applicable in the following cases:
(i) PPE (Property, Plant & Equipment) which are classified as held for sale as per Ind AS 105
(ii) Biological assets (biological assets include biological animals and Plants. However, standard applies to
Bearer Plant but does not apply to Produce on bearer Plants).
(iii) The measurement and recognition of exploration and evaluation assets
(iv) Mineral rights and reserves like oil, natural gas and other such non-regenerative resources
However, PPE used to develop or maintain aforementioned assets shall fall under this standard.

3. Lets now see what ‘Property Plant and Equipment’ is :

Property, plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services or for rental to others, or for
administrative purposes; and

45
 Indian Accounting Standards

(b) are expected to be used during more than one period.

Held for use in production or

supply/ Rental /
PPE Tangible items Administrative purposes

Expected to use during more

than one period
Administrative purpose means:
 Selling & distribution
 Finance & Accounting
 Personnel & other function
Items of PPE acquired for safety or environmental reasons should be accounted under this standard.

6. Biological Assets:

Animal Plant

Is one which satisfies all the under mentioned conditions:

1.Is Used in Production or supply : of agricultural produce Bearer Plant
2. Is Expected to bear produce : For a period exceeding 12 months
3. Has a remote chance of being sold as agricultural produce

7.Recognition Criteria
The cost of any item of PPE must be recognized as an asset only when:
(a) It is apparent that the future economic benefits (FEB) related to such asset would flow to the business;
and
(b) Cost of such asset could be reliably measured

8. Measurement of PPE
 Initial Recognition : At Cost
 Subsequently : At cost or Revaluation Model

9. Initial Recognition:
Cost of PPE Includes:

Purchase Price Directly Attributable Cost De-commissioning or Restoration cost

Any cost directly attributable in bringing the asset to its present location and
Shall include import duties, condition necessary for it to be capable of operating in a manner as intended
non- refundable taxes etc. Any by the management.
trade discount or rebates Examples:
allowed shall be subtracted. Cost of site preparation , Initial delivery and handling charges, Installation and
assembling cost, Testing cost ( net proceeds after subtracting any related
income), Professional Fee etc.

46
Ind AS 16 - PPE

Cost not included in the Carrying amount of PPE:

i. Cost incurred while item is capable of operating as per desired intentions of the management but has not been
brought to use or is operated at less than full capacity
ii. Costs of conducting business in a new location or with a new class of customers
iii. cost of introducing a new product or service including advertising and promotional activity
iv. Administrative and other general costs

10. Module Questions

MQ - 1
Entity Nine X Ltd. Sets up a plant at the purchase price of Rs.5,00,000 plus GST at 18% (Intra-state). Freight
paid Rs. 20,000 plus GST at 18% (Intra-state). Paid Rs.10,000 as employee expenses for installation of the
plant. After the plant was put to use maintenance cost incurred Rs. 5,000. Measure the initial cost to be
recognized and pass journal. Estimated dismantling cost Rs.30,000, present value Rs.12,000.
Suggested Response:

Particulars (Rs.)
Purchase Price 5,00,000
Freight 20,000
Installation cost 10,000
Estimated dismantling cost 12,000
5,42,000

GST and maintenance cost not to be recognized in initial cost of asset.

Particulars (Rs.) (Rs.)

Machinery A/c Dr. 5,42,000
Input CGST A/c Dr. 46,800
Input SGST A/c Dr. 46,800
Maintenance Exp. A/c Dr. 5,000
To, Bank A/c 6,28,600
To Liability for Dismantling A/c 12,000

GST State (9%) Central (9%)

On Rs.5,00,000 Rs.45,000 Rs.45,000
On Rs. 20,000 Rs.1,800 Rs.1,800
Total Rs.46,800 Rs.46,800

MQ - 2
Entity Ten Ltd. has incurred the following transactions in respect of acquiring a plant is exchange of an old
plant :

47
 Indian Accounting Standards

(a) The old site was dismantled at a cost of Rs. 8,000, No estimated dismantling cost was
capitalized for the old plant. Scrap from the old site sold at Rs. 1,000.
(b) The new site was constructed at a cost of Rs. 48,000.
(c) The supplier of the new plant agreed to take away the old plant at fair value of Rs. 1,26,000.
(d) The new plant price was Rs. 3,20,000. The carrying amount of the old plant was Rs. 1,00,000.
(e) The present value estimate of dismantling the site is Rs. 16,000.
(f) Wages paid for installation of the plant Rs. 4,000 for trial run Rs.1,600.
(g) Freight paid Rs. 8,000.
(h) GST applies on supply of plant of 18% (Intra state) and on freight at 18% (intra state)
(i) Loss amounted to Rs.40,000 for low capacity utilization of the plant after installation.
(j) Rs. 10,000 was paid as cost of launching the product to be produced from the plant.
Recognise the asset value and pass journal.
Suggested Response:
Initial Recognition of Plant:

Particulars (Rs.)
Cost of construction of new site 48,000
Price of the new plant 3,20,000
Present value estimate of dismantling the site 16,000
Installation and trial Run 5,600
Freight 8,000
Machinery at initial cost : 3,97,600

Entries:

Particulars (Rs.) (Rs.)

Old Machinery A/c Dr. 8,000
To, Cash A/c 8,000
(Dismantling of old sets)
Cast A/c Dr. 1,000
To, Old Machinery A/c 1,000
(Scrap realized)
Machinery (New) A/c Dr. 3,97,600

To, Old Machinery A/c.(1,00,000 + 8,000 – 1,000) 1,07,000

To, Profit on Sale of Old Plant A/c (1,26,000 -1,07,000) 19,000

To, Cash A/c (3,20,000 – 1,26,000) 1,94,000
To Cash A/c (Freight installation + construction of site)
61,600
To Liability for dismantling A/c
16,000

48
Ind AS 16 - PPE

Note :
(ix) Loss Rs.40000 and (x) cost of launching product Rs.10,000 are charged to Profit and Loss A/c.
2. GST accounting has not been shown.

MQ - 3
Entity Eleven Ltd. Purchased an aircraft at a price of Rs.6,300 crores that requires major inspection and
overhauling every 4 years.
The estimated life of the aircraft is 15 years. The aircraft was purchased in 2019 and major inspection and
overhauling made in 2024 at a cost of Rs. 100 crores.
In 2025 A Ltd. Further incurred repair and maintenance in the engine to raise its capacity by 10% amounting
to Rs. 70 crores.
One worn out component in the wing was replaced in 2025 at a cost of Rs. 80 crores. The carrying amount of
the old component was Rs. 30 crores. Scrap realized Rs. 12 crores.
Find the amount to be recognized as expense and as asset in 2023, 2024 and in 2025 and also show the
carrying amount. The aircraft residual value is estimated at Rs. 300 crores.

Asset
Expense
Recognised/ De- Carrying amount
recognised

In 2023

Depreciation Rs.(6,300 - 400

300)/15 Carrying amount 4,700

(6,300 – 4×400)

In 2024
100
Major Inspection overhauling

Depreciation = Rs.400 + (Rs.100/4) 425

Carrying amount [Rs.4,700 + Rs.100 – Rs.425] 4,375

In 2025

Repair & Maintenance (Capacity increase) + 70

Replacement 80

Old component derecognized (30)

18
loss on disposal of old component
Rs.(30 – 12)

Depreciation 400 + 25 + 15 - 3 437

49
 Indian Accounting Standards

Carrying amount (Rs.4,375 + Rs.70 +Rs.80 –

Rs.30 – Rs.437)
4,058

MQ - 4

Entity Twelve Ltd. Purchased a machine at a price of Rs. 1,200 Lakhs. It paid freight 40 and installation cost
Rs. 80 Lakhs. IGST paid at 18%. Share of general overhead ascertained for the trial run of the machine Rs. 30
Lakhs. The labour cost and direct expenses for trial run is Rs. 60 Lakhs. The machine has been put to use on
01.04.2026.

The estimated dismantling cost of the machine at the end of its useful life of 10 years is Rs. 400 Lakhs.
Discounting rate to be applied is 5%. [PV estimated at Rs. 246 Lakhs ]
The machine requires major over hauling every 2 years at cost of Rs. 26 lakhs.
Pass journal entries and accounting treatments for the year 2026-27 and 2027-28.
Suggested Response:

Particulars Rs. in Lakhs Rs. In Lakhs

Purchase Price 1,200
Freight 40 1,240
Installation Cost 80
IGST not considered —
General overhead not considered —
Labour cost and expense for trial run 60
P.V. of estimated dismantling cost 2,46
Initial Cost /Depreciable amount 1,626
Less: Overhauling cost 26
to be depreciated in 2 years
Balance 1,600
to be depreciated in 10 years
Annual depreciation

Rs.13 + Rs.160 = Rs.173

MQ - 5
Alfa Ltd. Has machinery at cost Rs. 4,800 and provision for depreciation Rs. 1,600 as on 01.04.2027. On that
date the remaining life of the machine is 6 years with residual value of Rs. 800. On the same date one
component of the machine is replaced, the price of the new component is Rs. 600 and the cost of the old
component was Rs. 500 with accumulated depreciation Rs. 200. The supplier of the new component took the
old component at a fair value of Rs. 360.

50
Ind AS 16 - PPE

On 31.03.2028 the machine is revalued as per company policy at Rs. 5,000. On 31.03.2029 an impairment
loss of Rs. 900 has been recognized for the machine.
Pass journal entries and show the accounting treatments to be made in the financial statement for the years
ending on 31.03.2028, 31.03.2029 and 31.30.2030. Depreciation to be charged based on straight line method.

Particulars (Rs.)
On 1.4.2027 : Carrying amount Rs. (4,800 – 1,600) 3,200
Add. Replacement Cost of New Component 600
Less Carrying amount of old Rs. 500 – Rs. 200 i.e. Rs. 300 (300)
Profit on disposal of old machinery = Rs. 360 – Rs. 300 = Rs. 60
Carrying amount 3,500
Depreciation for 2027-2028 : (450)
Carrying amount – residual value] ÷ Life
Rs.(3,500 – Rs. 800)/6
On 31.03.2028 Carrying Amount 3,050
+ Revaluation Gain 1,950
On 31.03.2019 : Revalued at 5,000
Depreciation for 2019-2020 ( Rs. 450 + Rs. 1950/5) (840)
Carrying amount : Rs. (5,000 – 840) 4,160
Less: Impairment Loss (900)
On 31.03.2029 Carrying amount after Impairment 3,260
Depreciation. For 2020-2021: Rs. (3,260 – 800)/4 615

Entries:

Date Particulars (Rs.) (Rs.)

01.04.2027 Machinery A/c Dr. 600
To, Supplier A/c 600
Prov. for Depreciation Dr. 200
A/c Supplier A/c Dr. 360
To, Machinery A/c 500
To, Profit on Disposal of Machinery A/c 60
31.03.28 Depreciation A/c Dr. 450
To, Provision for Depreciation A/c 450
Machinery A/c Dr. 100
Provision for Depn. Dr. 1,850
A/c 1,950

51
 Indian Accounting Standards

To, Revaluation Surplus A/c

31.03.29 Depreciation A/c Dr. 840

To, Provision for Depreciation A/c 840

Impairment loss A/c Dr. 900

To, Machinery A/c. 900

31.03.30 Depreciation A/c Dr. 615

To, Provision for Depreciation A/c 615

11. PPE Acquired in Exchange

Valuation of PPE acquired in exchange

i. At fair value
ii. At carrying value of asset given up If the transaction does not have commercial substance ,or the fair
value of neither the asset received nor the asset given up can be measured reliably

Case Study - 11.1

Exchange of assets that lack commercial substance
Entity TMX exchanges Car X with a book value of Rs. 13,00,000 and having a fair value of Rs. 13,25,000,
for cash of Rs. 15,000 and Car Y which has a fair value of Rs.13,10,000.
Response:
Entity TMX giving up Car X with BV of Rs. 13,00,000 having Fair value of Rs. 13,25,000 and Receiving Cash
of Rs. 15,000 plus Car Y having Fair value of Rs. 13,10,000.
Since inflows and outflows are equal one may claim no commercial substance is involved.
Therefore, asset acquired shall be recognised at Book Value of Assets given up.
Entry:
Cash Dr. 15,000
Car Y a/c Dr. 12,85,000
To Car X 13,00,000

Case Study - 11.2

On March 31, 2022, ZX Company traded - in an old machine having a carrying amount of Rs. 1,68,000, and
paid cash difference of Rs. 60,000 for a new machine having a total cash price of Rs. 2,05,000. On March
31, 2023, what amount of loss should ZX Company recognize on this exchange?
Response:
As per Ind AS -16, When a PPE/ Fixed Asset is acquired in exchange or in part exchange for another asset,
the cost of the asset acquired should be recorded either at fair market value if commercial substance exists

52
Ind AS 16 - PPE

otherwise at the net book value of the asset given up, adjusted for any balancing payment or receipt of cash
or other consideration.
The cash price of the new machine represents its fair market value (FMV) which is Rs. 2,05,000.
Entity giving old machine (BV Rs. 1,68,000), along with cash Rs. 60,000 and acquires new machine having
cash Price ( fair Value) of Rs. 2,05,000 .
Since, entity is paying cash of Rs. 60,000 and giving old machine for the balance it means old machine is
being given at a value of Rs. 2,05,000– Rs. 60,000 = Rs. 1,45,000.
It also means old machine having a book value Rs. 1,68,000 is being given for 1,45,000 on the date of the
trade i.e. the difference of Rs. 23,000 must be recognized as a loss.
In this case entity is getting inflows worth Rs. 2,05,000 but in reality outflows are 1,68,000 + 60,000 =
2,28,000.
So flows differ and as such transaction has commercial substance. Asset acquired shall be valued at Fair
Value.
Entries
New machine a/c Dr. 2,05,000
To Cash 60,000
To Old Machine 1,45,000
SPL a/c Dr.23,000
To, Old Machine 23,000

12. Measurement after Initial Recognition

An entity may choose :

a. either the cost model or
b. the revaluation model as its accounting policy
for subsequent measurement.
A class of PPE is a grouping of assets of similar nature and use in operation.
Classes of PPE:
i. Land
ii. Land and buildings
iii. Machinery
iv. Ships
v. Aircrafts
vi. Motor vehicles
vii. Furniture and fixtures
viii. Office equipments
ix. Bearer Plants

53
 Indian Accounting Standards

12.1 Accounting Treatment:

First time revaluation (upward)

Case Study - 12.1

Increase in net book value is credited to owner’s interest under the head ‘Revaluation Reserve’.
Suppose a firm‘s Acquires PPE at cost of Rs. 5,00,000 on 1.4.27 . Presuming firm does first time revaluation
on 31.3.2029 and values it at Rs. 7,00,000 then entry will be:
PPE a/c Dr. 2,00,000
To Revaluation Reserve a/c 2,00,000

b. First time revaluation upward but subsequent R/L Downwards

Case Study - 12.2

Suppose a firm‘s Acquires PPE at cost of Rs. 5,00,000 on 1.4.25 . Presuming firm does first time revaluation
on 31.3.2027 and values it at Rs. 6,00,000 and again on 31.3.29 and fair value is determined at Rs. 4,90,000.
Entry will be:
31.3.27
Profit and loss (dep.) Dr. 1,00,000
To RR a/c 1,00,000
31.3.29
RR a/c Dr. 1,00,000
SPL Dr. 10,000
To PPE 1,10,000
Loss of Rs. 1,10,000 shall be Debited 1,00,000 to RR and remaining to profit and loss a/c

c. First revaluation (downward)

Case Study - 12.3

Suppose a firm‘s Acquires PPE at cost of Rs. 5,00,000 on 1.4.25 . Presuming firm does first time revaluation
on 31.3.2027 and Fair Value is determined at Rs. 4,50,000.:
Profit and loss (dep.) Dr. 50,000
PPE a/c 50,000
d. First revaluation downward subsequent revaluation downward

54
Ind AS 16 - PPE

Case Study - 12.4

Suppose a firm‘s Acquires PPE at cost of Rs. 5,00,000 on 1.4.23 . Presuming firm does first time revaluation
on 31.3.2025 and Fair Value is determined at Rs. 4,50,000 and on 31.03.2027 a subsequent revaluation is
done Fair value is estimated at Rs. 5,25,000:
Profit and loss Dr. 50,000
To PPE a/c 50,000
PPE a/c Dr. 75,000
To SPL a/c 50,000
To Revaluation Reserve a/c 25,000

13. Subsequent costs

13.1 Cost of day to day Servicing

Such expenditure is charged to P/L.

13.2.Replacement parts
Entity recognises such costs in the carrying cost of PPE.

13.3 Major inspections or overhauls

When each major inspection is performed, its cost is recognised in the carrying amount of the item of
property, plant and equipment as a replacement if the recognition criteria are satisfied.
Any remaining carrying amount of the cost of the previous inspection is derecognised.

Case Study - 13.3.1

A Co. has scrapped a semi-automatic part of a machine [not written off] and replaced with a more expensive
fully automatic part which has doubled the output of the machine. At the same time the machine was moved
to a more suitable place in the factory, which involved the building of a new foundation in addition to the cost
of dismantling and re- erection. The Co. wants to charge the whole exp. to revenue.
Response:
The written down value of the semi automatic part should be written off to P&L a/c. and whole expenditure
incurred in purchasing the fully automatic part and repositioning the machine should be treated as capital
exp.
Even expenditure on dismantling and re-erection should be capitalized.
In the light of the above facts one may say that the contention of the company to charge the entire amount to
revenue- is not correct.

14. Cost of Self Constructed Assets

55
 Indian Accounting Standards

Asset is shown at actual cost.

Case Study - 14.1

A company has made additions to its factory buildings by its own workmen at a cost of 5,00,000 for wages
and materials. The lowest estimate from an outside contractor to carry out the same work was for Rs.
6,00,000. The directors contend that as they were fully entitled to employ an outside contractor it is
reasonable to debit the Factory Building a/c with Rs. 6,00,000.
Response:
Standard clearly states that gross book value of the asset- which is self constructed should be computed on
the basis of actual cost incurred and not on the notional basis- and further no internal profits on such assets
should be considered.
Therefore the contention of the company to show the asset at Rs. 6,00,000 is incorrect.

Case Study - 14.2

TPM limited, during the year made additions to its factory by using its own workforce, at a cost of Rs.
4,50,000 as wages and materials. The lowest estimate from an outside contractor to carry out the same work
was Rs. 6,00,000. The directors contend that, since they are fully entitled to employ an outside contractor, it
is reasonable to debit the Factory Building Account with Rs. 6,00,000. Comment whether the directors’
contention is right in view of provisions of Ind AS- 16 – Accounting for PPE.
Response:
Self constructed assets must be recorded at Actual Cost that is 4,50,000.

15. Depreciation

Depreciation depends upon :

 Useful life
 Residual value
 Cost of the asset
Depreciable amount = Cost - residual value
Depreciable amount should be allocated on a systematic basis over asset's useful life.
Residual Value, useful Life and Depreciable amount of an asset should be reviewed annually at each
reporting date.
Changes in Residual value, Depreciable amount and Useful Life are considered as changes in Estimates and
are accounted for prospectively.
Depreciation is charged to SPL unless it is included in the carrying amount of an asset.
Depreciation begins when asset is available for use.
Depreciation ceases at earlier of the date:

56
Ind AS 16 - PPE

On which asset held for disposal or sale Date of De-recognition

Case Study - 15.1 - Depreciation - change of method

A company acquired a machine on 1.04.26 for Rs. 5,00,000. The company charged depreciation upto 2028-
29 on SLM basis with estimated working life of 10 years and scrap value of Rs. 50,000.
From 2029-30, the company decided to change depreciation method at 20% reducing balance method.
Compute the amount of depreciation to be debited to Profit and loss account for the year 2019-20
Response:
Annual depreciation= (5,00,000 - 50,000) / 10 = 45,000
WDV at the end of 2028-29 = 5,00,000 - 45,000 x 3 = 3,65,000
Depreciation to be charged in 2029-30:
Book value as at 31.03.29 = 3,65,000
Depreciation = 3,65,000 x 20% = 73,000

Case Study - 15.2 - Depreciation- reassessment of useful life

A computer costing Rs. 60,000 is depreciated on a straight line basis assuming 10 years working life and Nil
Residual value, for three years. The estimate of remaining useful life after third year was reassessed at 5
years. Calculate depreciation as per provisions of Ind - AS-16.
Response:
Present Book value that is after 3 years 60,000 – (60,000 x 3) = 42,000
Revised Depreciable amount per annum = 42,000 / 5 = 8,400

Case Study - 15.3 - Depreciation- Revaluation- Re-Estimated Useful Life - Sale/Disposal

V-7 limited purchased machinery on 1.4.18 for Rs. 15,00,000. The company charged straight line method of
depreciation based on 15 years working life estimate and residual value of Rs. 3,00,000.
At the beginning of the 4th year, the company by way systematic evaluation revalued the machinery upward
by 20% of the net book value as on date and also re-estimated the useful life as 7 years and scrap value as
nil.
The increase in net book value was credited directly to revaluation reserve account.
Depreciation (on SLM) later on was charged to profit and loss account.
At the beginning of 8th year the company decided to dispose -off the machinery and estimated the realisable
value to be of Rs. 2,00,000

57
 Indian Accounting Standards

You are required to ascertain the amount to be charged to profit and loss at the beginning of the 8th year
with reference to Ind AS -16.

Response:
Cost of machinery on 1.4.2018 15,00,000
Depreciation per annum (15,00,000-3,00,000)/15 80,000
Depreciation till 31.3.2021( for three years) 80,000 x 3 2,40,000
Net book value as on 1.4.2021 15,00,000 - 2,40,000 12,60,000
Book value less depreciation as on 1.4.2021 12,60,000
Add: Increase in Book Value @ 20% 2,52,000
Revised Book value as on 1.4.2021 15,12,000
Revised Depreciation (15,12,000 - 0)/7 years = 2,16,000
Depreciation for 21-22, 22-23,23-24 and 24-25 2,16,000 x 4 8,64,000
Book value as on 31.03.25/1.4.25 that is beginning 6,48,000
of 8th year
Loss on Disposal 6,48,000 -2,00,000 4,48,000
Loss to be charged against Revaluation Reserve 2,52,000
Amount to be charged against Profit and loss a/c 0

Case Study - 15.4 - Depreciation-Re-Estimated Useful Life -

Machinery with useful life of 6 years was purchased on 1.04.2026 for Rs. 1,50,000. Depreciation was
provided on SLM for first three years considering a residual value of 10% of cost.
In the beginning of 4th year the company re-assessed the remaining useful life of the machinery at 4 years
and residual value was estimated at 5% of the original cost.
The accountant re-calculated the revised depreciation historically and charged the difference to profit and
loss account.
You are required to comment on the treatment by accountant and calculate the depreciation to be charged
for the fourth year.
Response:
Depreciation per year 1,35,000 / 6 22,500
Depreciation for 3 years 22,500 x 3 67,500
WDV at the beginning of the 4th Year 1,35,000 - 67,500 82,500
Revised Depreciation:
Depreciable amount 82,500 - 1,50,000 x 5%
82,500 - 7,500 75,000
Remaining Life 4 years
Depreciation for the 4th year and onwards 18,750

58
Ind AS 16 - PPE

Case Study - 15.5 - Depreciation/ Re-assessment of Useful life/ Retirement of PPE

Sunshine Ltd. expects that a plant has become useless which is appearing in the books at Rs. 20 lakhs
gross value. The company charges SLM depreciation on a period of 10 years estimated life and estimated
scrap value of 3%. At the end of 7th year the plant has been assessed as useless. Its estimated net
realisable value is Rs. 6,20,000. Determine the loss/gain on retirement of the fixed assets.
Response:
 Cost of the plant Rs. 20,00,000
 Estimated realisable value Rs. 60,000
 Depreciable amount Rs. 19,40,000
 Depreciation per year Rs. 1,94,000
 Written down value at the end of 7th Year = 20,00,000 - (1,94,000 X 7) = Rs. 6,42,000
As per of Ind-AS-16 items of PPE/Fixed Assets that have been retired from active use and are held for
disposal are stated at the lower of their net book value and net realisable value and are shown separately in
the financial statements. Any expected loss is recognized immediately in the profit and loss statement.
Accordingly, the loss of Rs. 22,000 (6,42,000-6,20,000) to be shown in the and loss account and asset of Rs.
6,20,000 to be shown in the balance sheet separately.

Case Study - 15.6 - Depreciation/ Re-assessment of useful life/ Retirement of PPE

F-99 limited expects that a plant becomes useless which is appearing in the books at Rs. 10 lakhs gross
value. The company charges SLM depreciation over an estimated period of 10 years and estimated scrap
value is 3% of the cost. At the end of the 7th year the plant has been assessed as useless and decided to
sell. Its estimated net realisable value is Rs. 3,10,000. Determine the loss/gain on retirement of the PPE.
Response:
Cost of the plant Rs. 10,00,000
Estimated RV at the beginning = 10,00,000 x 3% = 30,000
Depreciable amount 10,00,000 – 30,000 = 9,70,000
Depreciation per year = 9,70,000 / 10 = 97,000
WDV at the end of 7th year= 10,00,000 – 97,000 x 7 = 3,21,000
 Such asset is stated at the lower of net book value and net realisable value in the financial
statement.
 Any expected loss is recognized immediately in the profit & loss statement.
 It should be separately shown in financial statement i.e., balance sheet.
In the given case, the expected loss is 3,21,000 -3,10,000 = 11,000 which should be charged to SPL
Further PPE should be shown in the balance sheet at Rs. 3,10,000

59
 Indian Accounting Standards

16 . Acquisition of PPE at consolidated Price

Case Study - 16.1

K99 acquired Three Plants at a consolidated price of Rs. 100 lakhs. Fair value of these Plants is 60, 70 and
120 lakhs respectively, determined by a competent valuer.
Show the cost of each Plant.
Rs. in Lakhs
P1 P2 P3 Total
Consolidated Amount 100
Fair Value 60 70 120
Ratio 60/250 70/250 120/250
Cost Apportionment 24 28 48 100

17 - Derecognition of PPE

PPE should be derecognised when it is

 no longer expected to generate future economic benefit or
 when it is disposed of
 Gain or loss on disposal, is to be calculated by comparing the difference between:
 Carrying value on date of disposal
 Disposal proceeds

18 - Subsequent Price adjustments

Case Study – 18.1

A company has purchased plant and machinery in the year 2019-20 for Rs. 90 lacs. A balance of Rs. 10
lakhs is still payable to the suppliers for the same. The supplier waived off the balance amount during the
financial year 2022-23. The company treated it as income and credited to profit and loss account during
2022-23.
Whether accounting treatment of the company is correct. If not, state with reasons.
Response:
As per Ind AS -16 the cost of PPE/Fixed assets may undergo changes subsequent to its acquisition or
construction on account of exchange fluctuation, price adjustments, and changes in duties or similar factors.
Hence, the treatment done by the company is not correct. Rs. 10 lakhs should be deducted from the cost of
fixed assets.

60
Ind AS 16 - PPE

19. Deferred credit

Case Study: 19.1

P-13 Limited purchased a car on 1.4.27 for Rs. 18 lakhs from a supplier- who normally offers 3 months
credit facility. However, P-13 acquired it under an agreement whereby it would pay the amount of the car
after a period of 2 years. Presume borrowing rate as 10%. Show the amount of cost of car.
Cost of the car shall be : Cash Price equivalent
Cash price equivalent shall be: 18,00,000 x PVF at 10% for 2 years i.e. 0.826
= 14,86,800
out of total absolute payment of 18,00,000, 14,86,800 shall be treated as payment towards cost of plant and
balance of 3,13,200 as interest

21. Disclosure
Financial statements should disclose, for every class of PPE:
(i) Measurement basis for determining carrying amount
(ii) Depreciation methods used
(iii) Depreciation rates/ Useful lives of the assets
(iv) Aggregate carrying amount and accrued depreciation at the start and at the end of period
(v) Existence and value of restrictions on the title and PPE pledged as collateral for liabilities
(vi) Amount of expenditure recognized in carrying amount of an item of PPE during its construction
(vii) Amount with respect to contractual commitment for acquisition of PPE

Questions from Examination Papers and MTPs

1. MTP June 23 Term / Dec 24 Term

(a) D Ltd. has incurred the following transactions in respect of acquiring a plant in exchange of an old plant:

(i) The old site was dismantled at a cost of Rs. 16,000, No estimated dismantling cost was capitalized for the

old plant. Scrap from the old site sold at Rs. 2,000.

(ii) The new site was constructed at a cost of Rs. 96,000.

(iii) The supplier of the new plant agreed to take away the old plant at fair value of Rs. 3,52,000.

(iv) The new plant price was Rs. 6,40,000. The carrying amount of the old plant was Rs. 2,00,000.

(v) The present value estimate of dismantling the site is Rs. 32,000.

(vi) Wages paid for installation of the plant Rs. 8,000 for trial run Rs. 3,200.

(vii) Freight paid Rs. 16,000.

(viii) GST applies on supply of plant of 18% (Intra state) and on freight at 18% (intra state)

61
 Indian Accounting Standards

(ix) Loss amounted to Rs. 80,000 for low-capacity utilization of the plant after installation.

(x) Rs. 20,000 was paid as cost of launching the product to be produced from the plant.

Analyse the above information to determine the value to be recognised for the asset.

Please write the text for the Note to disclosed in the Annual Report of the Company

Asset is recognized in the class Machinery under PPE as non-current asset. It is valued at initial cost

measured as follows:

Particulars Rs.

Cost of construction of new site 96,000

Price of the new plant 6,40,000

Present value estimate of dismantling the site 32,000

Installation and trial run 11,200

Freight 16,000

Machinery at initial cost 7,95,200

Particulars Rs. Rs.

Old Machinery A/c Dr. 16,000

To, Cash A/c (Dismantling of old sets) 16,000

Cast A/c Dr. 2,000

To, Old Machinery A/c(Scrap realized) 2,000

Machinery (New) A/c Dr. 7,95,200

To, Old Machinery A/c. (2,00,000 + 16,000 – 2,000) 2,14,000

To, Profit on Sale of Old Plant A/c (2,52,000 – 2,14,000) 38,000

To, Supplier A/c or Cash A/c (6,40,000 – 2,52,000) 3,88,000

To Cash A/c (Freight installation + construction of site) 1,23,200

To Liability for dismantling A/c 32,000

June 23 :
PARMATMA TULSI LId provides you the following information:
01.04.2015 Borrowed Rs. 5,00,000 @12 % p.a. to construct 10 Machines and incurred 8,00,000 on
Materials, 2,00,000 on Labour, 50,000 towards freight & insurance, Rs. 20,000 towards
carriage inward, Rs. 10,000 on-site preparation & installation. Estimated total physical life

62
Ind AS 16 - PPE

is 10 years but the company considers it is likely that it will sell the property after 4 years.
01.10.2016 Machines became ready for trial run production after incurring Expenses on Trial Run
20,000. Sale Proceeds of Goods produced during the trial run 5,000.
01.01.2017 Machines became ready for commercial production. The
estimated residual value is 2,00,000. Govt. Grant received for these machines 2,00,000.
01.10.2017 The company does not begin using the machine until lst April, 2017. Put the machines to
commence the commercial production.
01.10.2017 Sold one machine for 93,500.
31.03.2019 Remaining useful life of the property is reassessed as 4 years and the residual value is
re-estimated at 2,20,000 and the property is revalued upwards by 45,000.
31.03.2020 The company decides to adopt written-down value method by charging depreciation @
20%.
31.03.21 The Machines became idle and are retired from active use (but not held for disposal).
31.03.22 The ldle Machines are held for disposal but the Machines could not be disposed off till
the end of the year when Realizable Value of Machines is 75% of carrying amount
subject to 10 % Realizable Expenses.
31.03.2023 The Idle Machines held for disposal during year are actually disposed off for 75% of the
carrying amount.

Required: Prepare Plant and Machinery A/c as per Ind AS 16.

Suggested Answers of the Institute
As per Plant & Machinery A/c
Closing balance as on 31-03-2017 = Rs. 9,50,000
Closing balance as on 31-03-2018 = Rs. 6,75,000
Closing balance as on 31-03-2019 = Rs. 5,95,000
Closing balance as on 31-03-2020 = Rs. 4,76,000
Closing balance as on 31-03-2021 = Rs. 3,80,000
Closing balance as on 31-03-2012 = Rs. 2,57,040
Loss on sale of Assets 31-03-2023 = Rs. 64,260

Machine Account
1.01.15 to material + Labour + F&I + 10,80,000
CI + SP & Installation
31.03.16 Interest 60,000 31.03.16 c/d 11,40,000

1.4.16 b/d 11,40,000 1.1.17 Grant 2,00,000

1.10.16 TR Expenses Net 15,000 31.0.17 c/d 9,80,000
1.10.16 Interest 30,000

63
 Indian Accounting Standards

1.4.17 9,80,000 1.10.17 Bank 93,500

1.10.17 P&L Profit on sale 11,250 Dep. on Machine sold 11,750
31.03.18 Depreciation 2,11,500
c/d 6,74,500 /
6,75,000

1.4.18 b/d 6,75,000 31.03. 19 Depreciation 1,25,000

ARR 45,000 c/d B.F. 5,95,000

1.4.19 b/d 5,95,000 31.03. 20 Depreciation @ 20% 1,19,000

Bal. c/d 4,76,000

1.4.20 b/d 4,76,000 31.03.21 Depreciation @ 20% 95,200

Bal. c/d 3,80,800

1.4.21 b/d 3,80,800 31.3.22 1,23,760

P/L : loss
Balance c/d : 75% of 3,80,800 = 2,57,040
2,85,600
Less R. Expenses 28,560

1.4.22 2,57,040 31.3.23

Bank - Sale 2,57,040 x 75% 1,92,780
PL 64,260

Book value of Machine sold :

Depreciable cost of 10 machine 11,40 000 - 2,00,000 = 9,40,000
Depreciable cost per machine = 9,40,000 / 10 = 94,000
Depreciation per machine : 94,000/4 = 23,500
Less Dep. For 6 months depreciation : 23,500 = x 6/12 = 11,750
Book Value as at 1.10.17 = 94,000 - 11,750 = 82,250
Sold for 93,500
Profit 11,250
Dep. On Remaining machines : 11,40,000 - 2,00,000 = 94,000
10
Depreciable amount of Remaining Machine : 94,000 x 9 = 8,46,000
Depreciation per year : 8,46,000 / 4 = 2,11,500

64
Ind AS 16 - PPE

31.03.19 : Book value of Remaining machine 6,75,000

+ R/L 45,000
Less : RV 2,20,000
Revised book Value 5,00,000
÷
Life 4 Year
Depreciation 1,25,000

Website: www.sanjaywelkins official.com

You Tube Channel
1. sanjaywelkinsofficial
2. Authorised Associated channels
a. cmavirtualplanet - English
b. cmavirtualplanet - Hindi
Telgram channel : t.me/skwclasses

To Purchase Our Regular premium Courses / Books / any assistance:

Helpdesk : 7669416754 2. welkinsclasses1@gmail.com

65