CA NITIN GOEL IND AS 16

ICAI STUDY MATERIAL

Question 1 (Deferred Payment Credit)

On 1st April, 20X1, an item of property is offered for sale at ₹ 10 million, with payment terms being
three equal installments of ₹ 33,33,333 over a two-year period (payments are made on 1st April,
20X1, 31st March, 20X2 and 31st March, 20X3). Implicit interest rate of 5.36 percent p.a.
Pass necessary journal entries for recording the property in accordance with Ind AS 16.

Solution
Ind AS 16 requires that the cost of an item of PPE is the cash price equivalent at the recognition
date. Hence, the purchaser that takes up the deferred payment terms will recognize the
acquisition of the asset as follows:
Particulars Debit ₹ Credit ₹
On 1st April, 20X1
Property, Plant and Equipment (W.N. 1) 95,00,000
To Bank A/c 33,33,333
To Accounts Payable (W.N. 2) 61,66,667
(Initial recognition of property)
On 31st March, 20X2
Interest Expense (W.N. 2) Dr. 3,30,533
Accounts payable (W.N. 2) Dr. 30,02,800
To Bank A/c 33,33,333
(Recognition of interest expense and payment of second installment)
On 31st March, 20X3
Interest Expense (W.N. 2) Dr. 1,69,467
Accounts payable (W.N. 2) Dr. 31,63,867
To Bank A/c 33,33,334
(Recognition of interest expense and payment of final installment)

Working Notes:
1. Calculation of cash price equivalent at initial recognition
Discounting
Year Payment Present value
factor @ 5.36%
1.4.20X1 33,33,333 1.000 33,33,333
31.3.20X2 33,33,333 0.949 31,63,333
31.3.20X3 33,33,334 0.901 30,03,334
Initial date cash price equivalent 1,00,00,000 95,00,000

2. Calculation of interest expenses

Opening Interest @ Total payment at Principal amount
Closing balance
Year balance 5.36% year beginning in the instalment
(e) = (a) - (d)
(a) (b) = (a) x 5.36% (c) (d) = (c) – (b)
1.4.20X1 95,00,000 - 33,33,333 33,33,333 61,66,667
31.3.20X2 61,66,667 3,30,533 33,33,333 30,02,800 31,63,867
31.3.20X3 31,63,867 1,69,467* 33,33,334 31,63,867 Nil
*Difference of ₹ 116 [(31,63,867 x 5.36%) – (33,33,334 - 31,63,867)] is due to approximation.

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Question 2 (Exchange of Assets)

Pluto Ltd owns land and building which are carried in its balance sheet at an aggregate carrying
amount of ₹ 10 million. The fair value of such asset is ₹ 15 million. It exchanges the land and
building for a private jet, which has a fair value of ₹ 20 million, and pays additional ₹ 3 million in
cash.
Apply necessary provisions of Ind AS 16 for the above transactions and pass journal entry for the
same.

Solution
Provided that the transaction has commercial substance, the entity should recognize the private
jet at a cost of ₹ 18 million (being ₹ 15 million plus ₹ 3 million cash) and should recognize a profit
on disposal of the land and building of ₹ 5 million, calculated as follow:
(₹000)
Recognition of fair value of asset acquired (₹ 15,000 + ₹ 3,000) 18,000
Less: Carrying amount of land and building disposed (10,000)
Cash Paid (3,000)
Profit on exchange of assets 5,000

The required journal entry is therefore as follow:

Property, Plant and Equipment (Private Jet) Dr. 18,000
To Property, Plant and Equipment (Land and Building) 10,000
To Cash 3,000
To Profit on exchange of assets 5,000

Question 3 (Accumulated depreciation at the date of revaluation)

Jupiter Ltd. has an item of property, plant and equipment with an initial cost of ₹ 100,000. At the
date of revaluation accumulated depreciation amounted to ₹ 55,000. The fair value of asset, by
reference to transactions in similar assets, is assessed to be ₹ 65,000. Prepare the necessary
journal entries.

Solution
Method – I: Depreciation Elimination Approach
Accumulated depreciation Dr. 55,000
To Asset Cost 55,000
Asset Cost Dr. 20,000
To Revaluation reserve 20,000
The net result is that the asset has a carrying amount of ₹ 65,000 (100,000 – 55,000 + 20,000).

Method – II: Restatement Approach

Carrying amount (100,000 – 55,000) = 45,000
Fair value (revalued amount) 65,000
Surplus 20,000
% of surplus to the carrying amount (20,000 / 45,000) 44.44%

Entries to be Made:
Asset (1,00,000 x 44.44%) Dr. 44,444
To Accumulated Depreciation (55,000 x 44.44%) 24,444
To Revaluation Reserve 20,000
(Being the entry to increase both the original cost and the
accumulated depreciation by 44.44%)

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Question 4 (Revaluation model for entire class)

Venus Ltd. is a large manufacturing group. It owns a considerable number of industrial buildings,
such as factories and warehouses, and office buildings in several capital cities. The industrial
buildings are located in industrial zones whereas the office buildings are in central business
districts of the cities. Venus’s Ltd. management wants to apply the Ind AS 16 revaluation model to
subsequent measurement of the office buildings but continue to apply the historical cost model
to the industrial buildings. Analyse the accounting treatment to be applied by the management in
the light of Ind AS 16
Solution
Venus's Ltd. management can apply the revaluation model only to the office buildings.
The office buildings can be clearly distinguished from the industrial buildings in terms of their
function, their nature and their general location.
Ind AS 16 permits assets to be revalued on a class-by-class basis.
The different characteristics of the buildings enable them to be classified as different PPE classes.
The different measurement models can therefore be applied to these classes for subsequent
measurement. All properties within the class of office buildings must therefore be carried at
revalued amount. Separate disclosure of the two classes must be given in accordance with para
73 of Ind AS 16

Question 5 (Utilisation of Revaluation Surplus)

An item of PPE was purchased for ₹ 9,00,000 on 1st April, 20X1. It is estimated to have a useful
life of 10 years and is depreciated on a straight-line basis. On 1st April, 20X3, the asset is revalued
to ₹ 9,60,000. The useful life remains unchanged as ten years. Ignore impact of deferred taxes.
Calculate depreciation and revaluation surplus for 20X3-20X4 as per Ind AS 16.
Solution
Calculation of Additional Depreciation:
(₹)
Actual depreciation for 20X3-20X4 based on revalued amount (₹ 9,60,000/8) 1,20,000
Depreciation for 20X3-20X4 based on historical cost (₹ 9,00,000/10) (90,000)
Additional Depreciation 30,000
In the profit or loss for 20X3-20X4, a depreciation expense of ₹ 1,20,000 will be charged. A reserve
transfer, which will be shown in the statement of changes in equity, may be undertaken as follows:
Revaluation surplus Dr. 30,000
To Retained earnings 30,000
The closing balance on the revaluation surplus on 31st March, 20X4 will therefore be as follows:
Balance arising on revaluation (₹ 9,60,000 – ₹ 7,20,000) 2,40,000
Transfer to retained earnings (30,000)
2,10,000

Question 6 (Revision of Useful Life)

An asset which cost ₹ 10,000 was estimated to have a useful life of 10 years and residual value ₹
2,000. After two years, useful life was revised to 4 remaining years. Calculate the depreciation
charge for the years 1,2,3.
Solution
Year-1 Year-2 Year-3
Cost 10,000 10,000 10,000
Less: Accumulated Depreciation (800) (1,600) (3,200)
Carrying Amount 9,200 8,400 6,800
Charges for year (10,000- 2,000)/10 = (10,000- 2,000)/10 = (8,400- 2,000)/4
800 800 = 1,600
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Question 7 (Change in Depreciation Method)

An entity acquired an asset 3 years ago at a cost of ₹ 5 million. The depreciation method adopted
for the asset was 10% reducing balance method.
At the end of Year 3, the entity estimates that the remaining useful life of the asset is 8 years and
determines to adopt straight –line method from that date so as to reflect the revised estimated
pattern of recovery of economic benefits.
Calculate the depreciation charge for respective years in accordance with Ind AS 16.

Solution
Change in depreciation method shall be accounted for as a change in an accounting estimate in
accordance with Ind AS 8 and hence will have a prospective effect.
Depreciation charges for year 1 to 11 will be as follows:
Year 1 = ₹ 5,00,000
Year 2 = ₹ 4,50,000
Year 3 = ₹ 4,05,000
Year 4 to Year 11 (refer W.N.) = ₹ 4,55,625 p.a.
Working Note:
Year Opening balance of Depreciation @ Closing balance of
asset (a) 10% on (a) asset (c) = (a)- (b)
1 50,00,000 5,00,000 45,00,000
2 45,00,000 4,50,000 40,50,000
3 40,50,000 4,05,000 36,45,000
Year 3 onwards method of depreciation has been changed from reducing balance method to
straight line method for which it is assessed that the remaining useful life is 8 years. Hence
revised depreciation would be calculated as follows:
Revised depreciation as per straight line method = (Carrying amount as at the end of the 3rd year
– Residual value) / Remaining useful life
= ₹ 36,45,000 / 8 years = ₹ 4,55,625 per annum (for year 4 to year 11)

Question 8 (MTP May 2018 & MTP Nov 2023)

MS Ltd. has acquired a heavy machinery at a cost of ₹ 1,00,00,000 (with no breakdown of the
component parts). The estimated useful life is 10 years. At the end of the sixth year, one of the
major components, the turbine requires replacement, as further maintenance is uneconomical.
The remainder of the machine is perfect and is expected to last for the next four years. The cost
of a new turbine is ₹ 45,00,000. The discount rate assumed is 5%.
Analyse whether the cost of the new turbine can be recognized as an asset, and, if yes, then apply
the accounting treatment relevant to it.

Solution
The new turbine will produce economic benefits to MS Ltd., and the cost is measurable. Hence,
the item should be recognized as an asset. The original invoice for the machine did not specify the
cost of the turbine; however, the cost of the replacement ₹ 45,00,000 can be used as an indication
(usually by discounting) of the likely cost, six years previously.
If an appropriate discount rate is 5% per annum ₹45,00,000 discounted back six years amounts,
to ₹ 33,57,900 [₹ 45,00,000/(1.05)6], i.e., the approximate cost of turbine before 6 years.
The current carrying amount of the turbine which is required to be replaced of ₹ 13,43,160 would
be derecognized from the books of account, (i.e., Original Cost ₹ 33,57,900 as reduced by
accumulated depreciation for past 6 years ₹ 20,14,740, assuming depreciation is charged on
straight-line basis.)
The cost of new turbine, ₹ 45,00,000 would be added to the cost of machine, resulting in a revision
of carrying amount of machine to ₹ 71,56,840. (i.e., ₹ 40,00,000* – ₹ 13,43,160 + ₹ 45,00,000).
*Original cost of machine ₹ 1,00,00,000 reduced by accumulated depreciation (till the end of 6
years) ₹ 60,00,000.
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Question 9
On 1st April, 20X1, XYZ Ltd. acquired a machine under the following terms:
Particulars ₹
List price of machine 80,00,000
Import duty 5,00,000
Delivery fees 1,00,000
Electrical installation costs 10,00,000
Pre-production testing 4,00,000
Purchase of a five-year maintenance contract with vendor 7,00,000
In addition to the above information XYZ Ltd. was granted a trade discount of 10% on the initial list
price of the asset and a settlement discount of 5%, if payment for the machine was received within
one month of purchase. XYZ Ltd. paid for the plant on 20th April, 20X1.
Compute the cost of the asset to be recognized.

Solution
In accordance with Ind AS 16, all costs required to bring an asset to its present location and
condition for its intended use should be capitalized. Therefore, the initial purchase price of the
asset should be:
Particulars ₹
List price 80,00,000
Less: Trade discount (10%) (8,00,000)
72,00,000
Import duty 5,00,000
Delivery fees 1,00,000
Electrical installation costs 10,00,000
Pre-production testing 4,00,000
Total amount to be capitalized at 1st April, 20X1 92,00,000
Maintenance contract is a separate contract to get service, therefore, the maintenance contract
cost of ₹ 7,00,000 should be taken as a prepaid expense and charged to the profit or loss over a
period of 5 years. In addition, the settlement discount received of ₹ 3,60,000 (₹ 72,00,000 x 5%) is
to be shown as other income in the profit or loss.

Question 10
X Limited started construction on a building for its own use on 1st April, 20X0. The following costs
are incurred:
₹
Purchase price of land 30,00,000
Stamp duty & legal fee 2,00,000
Architect fee 2,00,000
Site preparation 50,000
Materials 10,00,000
Direct labour cost 4,00,000
General overheads 1,00,000
Other relevant information: Material costing ₹ 1,00,000 had been spoiled and therefore wasted
and a further ₹ 1,50,000 was spent on account of faulty design work. As a result of these problems,
work on the building was stopped for two weeks during November, 20X0 and it is estimated that
₹ 22,000 of the labour cost relate to that period. The building was completed on 1st January, 20X1
and brought in use 1st April, 20X1. X Limited had taken a loan of ₹ 40,00,000 on 1st April, 20X0 for
construction of the building. The loan carried an interest rate of 8% per annum and is repayable
on 1st April, 20X2. Assume that the entity did not considered the construction period as substantial
period of time as per Ind AS 23.
Calculate the cost of the building that will be included in tangible non-current asset as an addition?
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Solution
Only those costs which are directly attributable to bringing the asset into working condition for
its intended use should be included. Administration and general costs cannot be included. Cost of
abnormal amount of wasted material/ labour or other resources is not included as per para 22 of
Ind AS 16. Here, the cost of spoilt materials and faulty designs are assumed to be abnormal costs.
Also, it is assumed that the wastages and labour charges incurred are abnormal in nature. Hence,
same are also not included in the cost of PPE.
Amount to be included in Property, Plant and Equipment (PPE):
₹
Purchase price of land 30,00,000
Stamp duty & legal fee 2,00,000
Architect fee 2,00,000
Site preparation 50,000
Material (10,00,000 – 2,50,000) 7,50,000
Direct labour cost (4,00,000 – 22,000) 3,78,000
General overheads Nil
Interest* Nil
Total to be capitalized 45,78,000

Question 11
XYZ Ltd. purchased an asset on 1st January, 20X0, for ₹ 1,00,000 and the asset had an estimated
useful life of 10 years and a residual value of nil. The company has charged depreciation using the
straight-line method at ₹ 10,000 per annum. On 1st January, 20X4, the management of XYZ Ltd.
reviews the estimated life and decides that the asset will probably be useful for a further 4 years
and, therefore, the total life is revised to 8 years. Account for the asset for the remaining years.

Solution
Change in useful economic life of an asset is change in accounting estimate, which is to be applied
prospectively, i.e., the depreciation charge will need to be recalculated. On 1st January, 20X4,
when the asset’s net book value is ₹ 60,000. The company should amend the annual provision for
depreciation to charge the unamortised cost (namely, ₹ 60,000) over the revised remaining life of
four years. Consequently, it should charge depreciation for the next four years at ₹ 15,000 p.a.

Question 12 (MTP Dec 2021)

On 1st April, 20X1, Sun Ltd. purchased some land for ₹ 10 million (including legal costs of ₹ 1
million) in order to construct a new factory. Construction work commenced on 1st May, 20X1.
Sun Ltd incurred the following costs in relation with its construction:
a) Preparation and levelling of the land = ₹ 3,00,000.
b) Purchase of materials for the construction = ₹ 6.08 million in total.
c) Employment costs of the construction workers = ₹ 2,00,000 per month.
d) Overhead costs incurred directly on the construction of the factory = ₹ 1,00,000 per month.
e) Ongoing overhead costs allocated to the construction project using the company’s normal
overhead allocation model = ₹ 50,000 per month.
f) Income received during the temporary use of the factory premises as a car park during the
construction period = ₹ 50,000.
g) Costs of relocating employees to work at the new factory = ₹3,00,000.
h) Costs of the opening ceremony on 31st January, 20X2 = ₹ 1,50,000.
The factory was completed on 30th November, 20X1 (which is considered as substantial period of
time as per Ind AS 23) and production began on 1st February, 20X2. The overall useful life of the
factory building was estimated at 40 years from the date of completion. However, it is estimated
that the roof will need to be replaced 20 years after the date of completion and that the cost of
replacing the roof at current prices would be 30% of the total cost of the building.

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At the end of the 40-year period, Sun Ltd has a legally enforceable obligation to demolish the
factory and restore the site to its original condition. The directors estimate that the cost of
demolition in 40 years’ time (based on prices prevailing at that time) will be ₹ 20 million. An annual
risk adjusted discount rate which is appropriate to this project is 8%. The present value of ₹ 1
payable in 40 years’ time at an annual discount rate of 8% is 0.046.
The construction of the factory was partly financed by a loan of 17·5 million taken out on 1st April,
20X1. The loan was at an annual rate of interest of 6%. Sun Ltd received investment income of ₹
100,000 on the temporary investment of the proceeds.
Compute the carrying amount of the factory on the Balance Sheet of Sun Ltd at 31st March, 20X2.
Explain the treatment of all the amounts referred to in this part of the answer.

Solution
Computation of the cost of the factory
Description Included in Explanation
P.P.E. ₹
’000
Both the purchase of the land and the
Purchase of land 10,000 associated legal costs are direct costs of
constructing the factory.
Preparation and levelling 300 A direct cost of constructing the factory
Materials 6,080 A direct cost of constructing the factory
Employment costs of construction A direct cost of constructing the factory for a
1,400
workers seven-month period
A direct cost of constructing the factory for a
Direct overhead costs 700
seven-month period
Allocated overhead costs Nil Not a direct cost of construction
Not essential to the construction so
Income from use as a car park Nil
recognized directly in profit or loss
Relocation costs Nil Not a direct cost of construction
Opening ceremony Nil Not a direct cost of construction
Capitalize the interest cost incurred in a 7
month period (purchase of land would not
Finance costs 612.50 trigger off capitalization since land is not a
qualifying asset. Infact, the construction
started from 1st May, 20X1)
Investment income on temporary
(100) offset against the amount capitalized
investment of the loan proceeds
Demolition cost recognized as a Where an obligation must recognize as part
920
provision of the initial cost
Total 19,912.50

Computation of accumulated depreciation

Total depreciable amount 9,912.50 All of the net finance cost of 512.50 (612.50 –
100) has been allocated to the depreciable
amount. Also, acceptable to reduce by
allocating a portion to the non- depreciable
land element principle
Depreciation must be in two parts:
Depreciation of roof component 49.56 9,912.50 x 30% x 1/20 x 4/12
Depreciation of remainder 57.82 9,912.50 x 70% x 1/40 x 4/12
Total depreciation 107.38
Computation of carrying amount 19,805.12 19,912.50 – 107.38
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CA NITIN GOEL IND AS 16

Question 13
H Limited purchased an item of PPE costing ₹ 100 million which has useful life of 10 years. The
entity has a contractual decommissioning and site restoration obligation, estimated at ₹ 5 million
to be incurred at the end of 10th year. The current market-based discount rate is 8%.
The company follows SLM method of depreciation. H Limited follows the Cost Model for
accounting of PPE.
Determine the carrying value of an item of PPE and decommissioning liability at each year end
when
a. There is no change in the expected decommissioning expenses, expected timing of incurring
the decommissioning expense and / or the discount rate
b. At the end of Year 4, the entity expects that the estimated cash outflow on account of
decommissioning and site restoration to be incurred at the end of the useful life of the asset
will be ₹ 8 million (in place of ₹ 5 million, estimated in the past).
Determine in case (b), how H Limited need to account for the changes in the decommissioning
liability?

Solution
The present value of such decommissioning and site restoration obligation at the end of 10th year
is ₹ 2.32 million [being 5 / (1.08)10]. H Limited will recognize the present value of decommissioning
liability of ₹ 2.32 million as an addition to cost of PPE and will also recognize a corresponding
decommissioning liability. Further, entity will recognize unwinding of discount as finance charge.
a. The following table shows the relevant computations, if there is no change in the expected
decommissioning expenses, expected timing of incurring the decommissioning expense and /
or the discount rate: (₹ in million)
Depreciation Carrying Opening
Opening Unwinding Closing
Charge (on Amount of PPE Decommissi
Year Amount of Interest Decommissio
SLM) for 10 at the end of oning
of PPE @ 8% ning Liability
Years the year Liability
1 102.32 10.23 92.08 2.32 0.19 2.50
2 92.08 10.23 81.85 2.50 0.20 2.70
3 81.85 10.23 71.62 2.70 0.22 2.92
4 71.62 10.23 61.39 2.92 0.23 3.15
5 61.39 10.23 51.16 3.15 0.25 3.40
6 51.16 10.23 40.93 3.40 0.27 3.68
7 40.93 10.23 30.69 3.68 0.29 3.97
8 30.69 10.23 20.46 3.97 0.32 4.29
9 20.46 10.23 10.23 4.29 0.34 4.63
10 10.23 10.23 - 4.63 0.37 5.00
Total 102.32 2.68

b. The changes to the estimate of expected decommissioning obligation:

• The present value of the decommissioning liability at the end of Year 4 works out to be ₹
5.04 million [being 8/(1.08)6].
• As against this, the carrying amount of decommissioning liability at the end of Year 4 is ₹
3.15 million (as computed above).
• The changes in the decommissioning liability of ₹ 1.89 million (being ₹ 5.04 million less ₹
3.15 million) shall be added to the cost of the asset in the current period and the related
provision for decommissioning liability is also adjusted.
The journal entry will be:
PPE Dr. 1.89 million
To Provision for decommissioning liability 1.89 million

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CA NITIN GOEL IND AS 16

• The following table shows the calculations for years 5 - 10:

Carrying Closing
Opening Depreciation Opening Unwinding
Amount of Decommiss
Year Amount Charge SLM Decommission of Interest
PPE at end of ioning
of PPE – 10 Years ing Liability @8%
the year Liability
5 63.28 10.55 52.73 5.04 0.40 5.44
6 52.73 10.55 42.19 5.44 0.44 5.88
7 42.19 10.55 31.64 5.88 0.47 6.35
8 31.64 10.55 21.09 6.35 0.51 6.86
9 21.09 10.55 10.55 6.86 0.55 7.41
10 10.55 10.55 - 7.41 0.59 8.00
Total 63.28 2.96
Note that in the above table:
• Opening amount of PPE at the beginning of Year 5 is computed as ₹ 63.28 million (being
carrying amount of ₹ 61.39 million at the end of Year 4 plus increase of ₹ 1.89 million arising
due to increase in the present value of the decommissioning liability at the end of Year 4).
• The revised carrying amount of PPE (at ₹ 63.28 million) at the beginning of Year 5 will be
depreciated over the balance 6 years of the useful life).
• Opening decommissioning liability at the beginning of Year 5 is computed as ₹ 5.04 million
(being carrying amount of ₹ 3.15 million at the end of Year 4 plus increase of ₹ 1.89 million).
• Since the entity has adjusted the increase in the decommissioning liability against the
carrying amount of PPE, it needs to evaluate whether the new carrying amount (in this case,
₹ 63.28 million) is recoverable. If not, it will give rise to impairment loss, to be accounted for
under Ind AS 36.

Question 14
ABC Ltd. is installing a new plant at its production facility. It has incurred these costs:
Sr. No. Particulars ₹
1. Cost of the plant (cost per supplier’s invoice plus taxes) 25,00,000
2. Initial delivery and handling costs 2,00,000
3. Cost of site preparation 6,00,000
4. Consultants used for advice on the acquisition of the plant 7,00,000
5. Interest charges paid to supplier of plant for deferred credit 2,00,000
6. Net present value of estimated dismantling costs to be incurred after 7 3,00,000
years
7. Operating losses before commercial production 4,00,000
Advise ABC Ltd. on the costs that can be capitalized in accordance with Ind AS 16.

Solution
According to Ind AS 16, these costs can be capitalized:
S. No. Particular ₹
1. Cost of the plant 25,00,000
2. Initial delivery and handling costs 2,00,000
3. Cost of site preparation 6,00,000
4. Consultants’ fees 7,00,000
5. Net present value of estimated dismantling costs to 3,00,000
be incurred after 7 years
Total 43,00,000
Note: Interest charges paid on “Deferred credit terms” to the supplier of the plant (not a qualifying
asset) of ₹ 2,00,000 and operating losses before commercial production amounting to ₹ 4,00,000
are not regarded as directly attributable costs and thus cannot be capitalized. They should be
written off to the Statement of Profit and Loss in the period they are incurred.
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Question 15
B Ltd. owns an asset with an original cost of ₹ 2,00,000. On acquisition, management determined
that the useful life was 10 years and the residual value would be ₹ 20,000. The asset is now 8
years old, and during this time there have been no revisions to the assessed residual value.
At the end of year 8, management has reviewed the useful life and residual value and has
determined that the useful life can be extended to 12 years in view of the maintenance program
adopted by the company. As a result, the residual value will reduce to 10,000.
Analyze how would the above changes in estimates be accounted by B Ltd.

Solution
Calculation of accumulated depreciation till 8th year
Depreciable amount {Cost less residual value} = ₹ 2,00,000 – ₹ 20,000 = ₹ 1,80,000
Annual depreciation = Depreciable amount / Useful life = ₹ 1,80,000 / 10 = ₹ 18,000
Accumulated depreciation = 18,000 x No. of years (8) = ₹ 1,44,000.
Calculation of carrying amount at the end of the 8th year
The asset has a carrying amount of ₹ 56,000 at the end of year 8 [ie. ₹ 2,00,000 – ₹ 1,44,000]
Accounting of the changes in estimates
Revision of useful life to 12 years results in remaining useful life of 4 years (ie 12 years – 8 years).
The revised depreciable amount is ₹ 46,000 (₹ 56,000 – ₹ 10,000)
Thus, depreciation should be charged in future i.e. from 9th year onwards at ₹ 11,500 per annum
(₹ 46,000 / 4 years).

Question 16
X Ltd. has a machine which got damaged due to fire as on 31st January, 20X1. The carrying amount
of machine was ₹ 1,00,000 on that date. X Ltd. sold the damaged asset as scrap for ₹ 10,000. X Ltd.
has insured the same asset against damage. As on 31st March, 20X1, the compensation
proceedings were still in process but the insurance company has confirmed the claim.
Compensation of ₹ 50,000 is receivable from the insurance company. Determine the accounting
for the above transaction for X Ltd.

Solution
As per para 66 of Ind AS 16, impairment or losses of items of property, plant and equipment and
related claims for or payments of compensation from third parties are separate economic events
and should be accounted for separately.
X Ltd. should account for the above transaction as given below:
At the time of sale of scrap machine, X Ltd. should write off the carrying amount of asset from
books of account and provide a loss of ₹ 90,000. (i.e., carrying amount of ₹ 1,00,000 – realised
amount of ₹ 10,000) As on 31st March, 20X1, X Ltd. should recognize income of ₹ 50,000 against
the compensation receivable in its profit or loss.

Question 17
An entity has a nuclear power plant and a related decommissioning liability. The nuclear power
plant started operating on 1st April, 2XX1. The plant has a useful life of 40 years. Its initial cost was
₹ 1,20,000 which included an amount for decommissioning costs of ₹ 10,000, which represented
₹ 70,400 in estimated cash flows payable in 40 years discounted at a risk adjusted rate of 5 per
cent. The entity’s financial year ends on 31st March. After 10 years, the net present value of the
decommissioning liability has decreased by ₹ 8,000. The discount rate has not yet changed.

Examine how the entity will account for the above changes in decommissioning liability in the 11th
year, if it adopts cost model.

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Solution
On 31st March, 2X11, the plant is 10 years old. Accumulated depreciation is ₹ 30,000 [(₹ 120,000 x
10)/40 years]. Due to unwinding of discount @ 5% over the 10 years, the amount of
decommissioning liability has increased from ₹ 10,000 to ₹ 16,300 (approx.).
On 31st March, 2X11, the discount rate has not changed. However, the entity estimates that, as a
result of technological advances, the net present value of the decommissioning liability has
decreased by ₹ 8,000. Accordingly, the entity adjusts the decommissioning liability from ₹ 16,300
to ₹ 8,300.
On this date, the entity passes the following journal entry to reflect the change:
Provision for decommissioning liability Dr. ₹ 8,000
To Asset ₹ 8,000
Following this adjustment, the carrying amount of the asset is ₹ 82,000 (₹ 1,20,000 – ₹ 8,000 - ₹
30,000), which will be depreciated over the remaining 30 years of the asset’s life giving a
depreciation expense for the next year of ₹ 2,733 (₹ 82,000/30). The next year’s finance cost for
unwinding of discount will be ₹ 415 (₹ 8,300 × 5%).

Question 18 (MTP May 2019 & MTP Nov 2019)

An entity has a nuclear power plant and a related decommissioning liability. The nuclear power
plant started operating on 1st April, 20X1. The plant has a useful life of 40 years. Its initial cost was
₹ 1,20,000. This included an amount for decommissioning costs of ₹ 10,000, which represented ₹
70,400 in estimated cash flows payable in 40 years discounted at a risk adjusted rate of 5 per
cent. The entity’s financial year ends on 31st March. Assume that a market-based discounted cash
flow valuation of ₹ 1,15,000 is obtained at 31st March, 20X4. This valuation is after deduction of an
allowance of ₹ 11,600 for decommissioning costs, which represents no change to the original
estimate, after the unwinding of three years’ discount. On 31st March, 20X5, the entity estimates
that, as a result of technological advances, the present value of the decommissioning liability has
decreased by ₹ 5,000. The entity decides that a full valuation of the asset is needed at 31st March,
20X5, in order to ensure that the carrying amount does not differ materially from fair value. The
asset is now valued at ₹ 1,07,000, which is net of an allowance for the reduced decommissioning
obligation. Examine how will the entity account for the above changes in decommissioning liability
if it adopts revaluation model.

Solution
At 31st March, 20X4:
Asset at valuation (1) 1,26,600
Accumulated depreciation Nil
Decommissioning liability (11,600)
Net assets 1,15,000
Retained earnings (2) (10,600)
Revaluation surplus (3) 15,600
Notes:
1. When accounting for revalued assets to which decommissioning liabilities attach, it is
important to understand the basis of the valuation obtained. For example:
a. if an asset is valued on a discounted cash flow basis, some valuers may value the asset
without deducting any allowance for decommissioning costs (a ‘gross’ valuation), whereas
others may value the asset after deducting an allowance for decommissioning costs (a
‘net’ valuation), because an entity acquiring the asset will generally also assume the
decommissioning obligation. For financial reporting purposes, the decommissioning
obligation is recognized as a separate liability, and is not deducted from the asset.
Accordingly, if the asset is valued on a net basis, it is necessary to adjust the valuation
obtained by adding back the allowance for liability, so that the liability is not counted twice.

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b. if an asset is valued on a depreciated replacement cost basis, the valuation obtained may
not include an amount for the decommissioning component of the asset. If it does not, an
appropriate amount will need to be added to the valuation to reflect the depreciated
replacement cost of that component. Since, the asset is valued on a net basis, it is
necessary to adjust the valuation obtained by adding back the allowance for the liability.
Valuation obtained of ₹ 1,15,000 plus decommissioning costs of ₹ 11,600, allowed for in the
valuation but recognized as a separate liability = ₹ 1,26,600.
2. Three years’ depreciation on original cost ₹ 1,20,000 × 3/40 = ₹ 9,000 plus cumulative discount
on 10,000 at 5 per cent compound = ₹ 1,600; total ₹ 10,600.
3. Revalued amount ₹ 1,26,600 less previous net book value of ₹ 1,11,000 (cost ₹ 120,000 less
accumulated depreciation ₹ 9,000).
The depreciation expense for 20X4-20X5 is therefore ₹ 3,420 (₹ 1,26,600 x 1/37) and the discount
expense for 20X5 is ₹ 600 (₹ 11,600 x 5% = ₹ 580 or ₹ 600 (to the nearest 100). On 31st March, 20X5,
the decommissioning liability (before any adjustment) is ₹ 12,200. However, as per the estimate
of the entity, the present value of the decommissioning liability has decreased by ₹ 5,000.
Accordingly, the entity adjusts the decommissioning liability from ₹ 12,200 to ₹ 7,200.
The whole of this adjustment is taken to revaluation surplus, because it does not exceed the
carrying amount that would have been recognized had the asset been carried under the cost
model. If it had done, the excess would have been taken to profit or loss. The entity makes the
following journal entry to reflect the change:
Provision for decommissioning liability Dr. ₹ 5,000
To Revaluation surplus ₹ 5,000
As at 31st March, 20X5, the entity revalued its asset at ₹ 1,07,000, which is net of an allowance of
₹ 7,200 for the reduced decommissioning obligation that should be recognized as a separate
liability. The valuation of the asset for financial reporting purposes, before deducting this
allowance, is therefore ₹ 1,14,200. The following additional journal entry is needed:
Notes:
₹ ₹
Accumulated depreciation (1) Dr. 3,420
To Asset at valuation 3,420
Revaluation surplus (2) Dr. 8,980
To Asset at valuation (3) 8,980
(1) Eliminating accumulated depreciation of ₹ 3,420 in accordance with entity’s accounting policy.
(2) The debit is to revaluation surplus because the deficit arising on the revaluation does not
exceed the credit balance existing in the revaluation surplus in respect of the asset.
(3) Previous valuation (before allowance for decommissioning costs) ₹ 1,26,600, less cumulative
depreciation decommissioning costs) ₹ 3,420, less new valuation (before allowance for ₹
1,14,200.
Following this valuation, the amounts included in the balance sheet are:
Asset at valuation 1,14,200
Accumulated depreciation Nil
Decommissioning liability (7,200)
Net assets 1,07,000
Retained earnings (1) (14,620)
Revaluation surplus (2) 11,620
Notes:
1. ₹ 10,600 at 31st March, 20X4, plus depreciation expense of expense of ₹ 3,420 and discount
600 = 14,620.
2. ₹ 15,600 at 31st March, 20X4, plus ₹ 5,000 arising on the decrease in the liability, less ₹ 8,980
deficit on revaluation = ₹ 11,620.

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Question 19 (RTP May 2018 & MTP Dec 2021 & MTP Nov 2024)
A Ltd. purchased some Property, Plant and Equipment on 1st April, 20X1, and estimated their
useful lives for the purpose of financial statements prepared on the basis of Ind AS. Following
were the original cost, and useful life of the various components of property, plant, and equipment
assessed on 1st April, 20X1:
Property, Plant and Equipment Original Cost Estimated useful life
Buildings ₹ 15,000,000 15 years
Plant and machinery ₹ 10,000,000 10 years
Furniture and fixtures ₹ 3,500,000 7 years
A Ltd. uses the straight-line method of depreciation. On 1st April, 20X4, the entity reviewed the
following useful lives of the property, plant, and equipment through an external valuation expert:
Buildings 10 years
Plant and machinery 7 years
Furniture and fixtures 5 years
There were no salvage values for the three components of the property, plant, and equipment
either initially or at the time the useful lives were revised.
Examine the impact of revaluation of useful life on the Statement of Profit and Loss for the year
ending 31st March, 20X5.

Solution
The annual depreciation charges prior to the change in useful life were
Buildings ₹ 1,50,00,000/15 = ₹ 10,00,000
Plant and machinery ₹ 1,00,00,000/10 = ₹ 10,00,000
Furniture and fixtures ₹ 35,00,000/7 = ₹ 5,00,000
Total = ₹ 25,00,000 (A)

The revised annual depreciation for the year ending 31st March, 20X5, would be
Buildings [₹ 1,50,00,000 – (₹ 10,00,000 × 3)] / 10 ₹ 12,00,000
Plant and machinery [₹ 1,00,00,000 – (₹ 10,00,000 × 3)] / 7 ₹ 10,00,000
Furniture and fixtures [₹ 35,00,000 – (₹ 5,00,000 × 3)] / 5 ₹ 4,00,000
Total ₹ 26,00,000 (B)
The impact on Statement of Profit and Loss for the year ending 31st March, 20X5
= ₹ 26,00,000 – ₹ 25,00,000 = ₹ 1,00,000
This is a change in accounting estimate which is adjusted prospectively in the period in which the
estimate is amended and, if relevant, to future periods if they are also affected. Accordingly, from
20X4-20X5 onward, excess of ₹ 1,00,000 will be charged in the Statement of Profit and Loss every
year till the time there is any further revision.

Question 20 (MTP May 2021 & RTP May 2019/May 2020 & PYQ Nov 2024 (5 Marks) (Similar)
Company X performed a revaluation of all of its plant and machinery at the beginning of 20X1. The
following information relates to one of the machinery:
₹
Gross carrying amount 2,00,000
Accumulated depreciation (straight-line method) (80,000)
Net carrying amount 1,20,000
Fair value 1,50,000
The useful life of the machinery is 10 years and the company uses Straight line method of
depreciation. The revaluation was performed at the end of 4 years.
Advise how should the company account for revaluation of plant and machinery and depreciation
subsequent to revaluation. Support your answer with journal entries.

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CA NITIN GOEL IND AS 16

Solution
According to paragraph 35 of Ind AS 16, when an item of property, plant and equipment is revalued,
the carrying amount of that asset is adjusted to the revalued amount. At the date of the
revaluation, the asset is treated in one of the following ways:
a. The gross carrying amount is adjusted in a manner that is consistent with the revaluation of
the carrying amount of the asset. For example, the gross carrying amount may be restated by
reference to observable market data or it may be restated proportionately to the change in
the carrying amount. The accumulated depreciation at the date of the revaluation is adjusted
to equal the difference between the gross carrying amount and the carrying amount of the
asset after taking into account accumulated impairment losses.
In such a situation, the revised carrying amount of the machinery will be as follows:
Gross carrying amount 2,50,000 [(₹ 2,00,000/₹ 1,20,000) x 1,50,000]
Net carrying amount 1,50,000
Accumulated depreciation 1,00,000 (₹ 2,50,000 – ₹ 1,50,000)

Journal entry
₹ ₹
Plant and Machinery (Gross Block) Dr. 50,000
To Accumulated Depreciation 20,000
To Revaluation Reserve 30,000

Depreciation subsequent to revaluation

Since Gross Block has been restated, depreciation charge will be ₹ 25,000 p.a. (₹ 2,50,000/10
years).
Journal entry
₹ ₹
Depreciation Dr. 25,000 p.a.
To Plant and Machinery (Gross Block) 25,000 p.a.

b. The accumulated depreciation is eliminated against the gross carrying amount of the asset.
The amount of the adjustment of accumulated depreciation forms part of the increase or
decrease in carrying amount that is accounted for in accordance with the paragraphs 39 and
40 of Ind AS 16.
In this case, the gross carrying amount is restated to 1,50,000 to reflect the fair value and
accumulated depreciation is set at zero.
Journal entry
₹ ₹
Accumulated Depreciation Dr. 80,000
To Plant and Machinery (Gross Block) 80,000
Plant and Machinery (Gross Block) Dr. 30,000
To Revaluation Reserve 30,000

Depreciation subsequent to revaluation

Since the revalued amount is the revised gross block, the useful life to be considered is the
remaining useful life of the asset which results in the same depreciation charge of ₹ 25,000
per annum as per Option A (₹ 1,50,000 / 6 years).
Journal entry
₹ ₹
Depreciation Dr. 25,000 p.a.
To Plant and Machinery (Gross Block) 25,000 p.a.

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Question 21 (RTP May 2021)

An entity has the following items of property, plant and equipment:
a) Property A — a vacant plot of land on which it intends to construct its new administration
headquarters;
b) Property B — a plot of land that it operates as a landfill site;
c) Property C — a plot of land on which its existing administration headquarters are built;
d) Property D — a plot of land on which its direct sales office is built;
e) Properties E1–E10 — ten separate retail outlets and the land on which they are built;
f) Equipment A — computer systems at its headquarters and direct sales office that are
integrated with the point of sale computer systems in the retail outlets;
g) Equipment B — point of sale computer systems in each of its retail outlets;
h) Furniture and fittings in its administrative headquarters and its sales office;
i) Shop fixtures and fittings in its retail outlets.
Determine the classes of property, plant and equipment for disclosure by the entity?

Solution
To answer this question one must make a materiality judgement.
A class of assets is defined as a grouping of assets of a similar nature and use in an entity’s
operations.
The nature of land without a building is different to the nature of land with a building.
Consequently, land without a building is a separate class of asset from land and buildings.
Furthermore, the nature and use of land operated as a landfill site is different from vacant land.
Hence, the entity should disclose Property A separately. The entity must apply judgement to
determine whether the entity’s retail outlets are sufficiently different in nature and use from its
office buildings, and thus constitute a separate class of land and buildings.
The computer equipment is integrated across the organization and would probably be classified
as a single separate class of asset.
Furniture and fittings used for administrative purposes could be sufficiently different to shop
fixtures and fittings in retail outlets to be classified in two separate classes of assets.

Question 22 (RTP Nov 2021)

Heaven Ltd. had purchased a machinery on 1.4.2X01 for ₹ 30,00,000, which is reflected in its books
at written down value of ₹ 17,50,000 on 1.4.2X06. The company has estimated an upward
revaluation of 10% on 1.4.2X06 to arrive at the fair value of the asset. Heaven Ltd. availed the option
given by Ind AS of transferring some of the surplus as the asset is used by an enterprise.
On 1.4.2X08, the machinery was revalued downward by 15% and the company also re estimated
the machinery’s remaining life to be 8 years. On 31.3.2X10 the machinery was sold for ₹ 9,35,000.
The company charges depreciation on straight line method.
Prepare machinery account in the books of Heaven Ltd. over its useful life to record the above
transactions.

Solution
In the books of Heaven Ltd.
Machinery A/c
Date Particulars Amount Date Particulars Amount
1.4.2X01 To Bank/ Vendor 30,00,000 31.3.2X02 By Depreciation 2,50,000
(W.N.1)
31.3.2X02 By Balance c/d 27,50,000
30,00,000 30,00,000
1.4.2X02 To Balance b/d 27,50,000 31.3.2X03 By Depreciation 2,50,000
31.3.2X03 By Balance c/d 25,00,000
27,50,000 27,50,000

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CA NITIN GOEL IND AS 16

1.4.2X03 To Balance b/d 25,00,000 31.3. 2X04 By Depreciation 2,50,000

31.3.2X04 By Balance c/d 22,50,000
25,00,000 25,00,000
1.4.2X04 To Balance b/d 22,50,000 31.3.2X05 By Depreciation 2,50,000
31.3.2X05 By Balance c/d 20,00,000
22,50,000 22,50,000
1.4.2X05 To Balance b/d 20,00,000 31.3.2X06 By Depreciation 2,50,000
31.3.2X06 By Balance c/d 17,50,000
20,00,000 20,00,000
1.4.2X06 To Balance b/d 17,50,000 31.3.2X07 By Depreciation(W.N.2) 2,75,000
1.4.2X06 To Revaluation Reserve 1,75,000 31.3.2X07 By Balance c/d 16,50,000
@ 10%
19,25,000 19,25,000
1.4.2X07 To Balance b/d 16,50,000 31.3.2X08 By Depreciation 2,75,000
31.3.2X08 By Balance c/d 13,75,000
16,50,000 16,50,000
1.4.2X08 To Balance b/d 13,75,000 1.4.2X08 By Revaluation Reserve 1,25,000
(W.N.4)
31.3.2X09 By Profit and Loss A/c 81,250
(W.N.5)
31.3.2X09 By Depreciation (W.N.3) 1,46,094
31.3.2X09 By Balance c/d 10,22,656
13,75,000 13,75,000
1.4.2X09 To Balance b/d 10,22,656 31.3.2X10 By Depreciation 1,46,094
31.3.2X10 To Profit and Loss A/c 58,438* 31.3.2X10 By Bank A/c 9,35,000
(balancing figure)
10,81,094 10,81,094
Working Notes:
1. Calculation of useful life of machinery on 1.4.2X01
Depreciation charge in 5 years = (₹ 30,00,000 – ₹ 17,50,000) = ₹ 12,50,000
Depreciation per year as per Straight Line method = ₹ 12,50,000/5 years = ₹ 2,50,000
Remaining useful life = ₹ 17,50,000 /₹ 2,50,000 = 7 years
Total useful life = 5 years + 7 years = 12 years
2. Depreciation after upward revaluation as on 1.4.2X06
Book value as on 1.4.2X06 = ₹ 17,50,000
Add: 10% upward revaluation = ₹ 1,75,000
Revalued amount = ₹ 19,25,000
Remaining useful life 7 years (Refer W.N.1)
Depreciation on revalued amount = ₹ 19,25,000/7 years = ₹ 2,75,000
3. Depreciation after downward revaluation as on 1.4.2X08
Book value as on 1.4.2X08 = ₹ 13,75,000
Less: 15% Downward revaluation = ₹ (2,06,250)
Revalued amount = ₹ 11,68,750
Revised useful life 8 years
Depreciation on revalued amount = ₹ 11,68,750/8 years = ₹ 1,46,094
4. Amount transferred from revaluation reserve
Revaluation reserve on 1.4.2X06 (A) = ₹ 1,75,000
Remaining useful life = 7 years
Amount transferred every year (₹ 1,75,000/7) = ₹ 25,000
Amount transferred in 2 years (₹ 25,000 x 2) (B) = ₹ 50,000
Balance of revaluation reserve on 1.4.2X08 (A-B) = ₹ 1,25,000
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5. Amount of downward revaluation to be charged to Profit and Loss Account

Downward revaluation as on 1.4.2X08 (W.N.3) = ₹ 2,06,250
Less: Adjusted from Revaluation reserve (W.N.4) = ₹ (1,25,000)
Amount transferred to Profit and Loss Account = ₹ 81,250

Question 23 (RTP May 2022 & MTP May 2023)

On 1st January, 20X1 an entity purchased an item of equipment for ₹ 600,000, including ₹ 50,000
refundable purchase taxes. The purchase price was funded by raising a loan of ₹ 605,000. In
addition, the entity has to pay ₹ 5,000 in loan raising fees to the Bank. The loan is secured against
the equipment.
In January 20X1 the entity incurred costs of ₹ 20,000 in transporting the equipment to the entity’s
site and ₹ 100,000 in installing the equipment at the site. At the end of the equipment’s 10-year
useful life the entity is required to dismantle the equipment and restore the building housing the
equipment. The present value of the cost of dismantling the equipment and restoring the building
is estimated to be ₹ 100,000.
In January 20X1 the entity’s engineer incurred the following costs in modifying the equipment so
that it can produce the products manufactured by the entity:
• Materials – ₹ 55,000
• Labour – ₹ 65,000
• Depreciation of plant and equipment used to perform the modifications – ₹ 15,000
In January 20X1, the entity’s production staff were trained in how to operate the new item of
equipment. Training costs included:
• Cost of an expert external instructor – ₹ 7,000
• Labour – ₹ 3,000
In February 20X1 the entity’s production team tested the equipment and the engineering team
made further modifications necessary to get the equipment to function as intended by
management. The following costs were incurred in the testing phase:
• Materials, net of ₹ 3,000 recovered from the sale of the scrapped output – ₹ 21,000
• Labour – ₹ 16,000
The equipment was ready for use on 1st March, 20X1. However, because of low initial order levels
the entity incurred a loss of ₹ 23,000 on operating the equipment during March. Thereafter the
equipment operated profitably. What is the cost of the equipment at initial recognition?

Solution
Description Calculation or reason ₹
Purchase price ₹ 600,000 purchase price minus ₹ 50,000 refundable 5,50,000
purchase taxes
Loan raising fee Offset against the measurement of the liability -
Transport cost Directly attributable expenditure 20,000
Installation costs Directly attributable expenditure 1,00,000
Environmental The obligation to dismantle and restore the environment 1,00,000
restoration costs arose from the installation of the equipment
Preparation costs ₹55,000 materials + ₹65,000 labour + ₹15,000 depreciation 1,35,000
Training costs Recognised as expenses in profit and loss account. The -
equipment was capable of operating in the manner intended
by management without incurring training costs.
Cost of testing ₹ 21,000 materials (i.e. net of the ₹ 3,000 recovered from the 37,000
sale of the scrapped output) + ₹ 16,000 labour
Operating loss Recognised as expenses in profit and loss account -
Borrowing costs Recognised as expenses in profit and loss account -
Cost of equipment 9,42,000

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Question 24 (RTP May 2023)

Company X built a new plant that was brought into use on 1st April, 20X1. The cost to construct the
plant was ₹ 1.5 crore. The estimated useful life of the plant is 20 years and Company X accounts
for the plant using the cost model.
The initial carrying amount of the plant included an amount of ₹ 10 lakh for decommissioning,
which was determined using a discount rate of 10%. On 31st March, 20X2, Company X remeasures
the provision for decommissioning to ₹ 13 lakh.
Provide necessary journal entries at the end of the year i.e. 31st March, 20X2 for recording of
depreciation and decommissioning provision.

Solution
Journal Entries in the books of Company X for the year ending ended 31st March, 20X2
₹ in lakh ₹ in lakh
Depreciation (profit or loss) Dr. 7.5
To Accumulated depreciation (plant) 7.5
(Being depreciation on plant recognised under straight-line
method (1,50,00,000 x 1/20))
Interest expense (profit or loss) Dr. 1.0
To Provision for decommissioning 1.0
(Being unwinding of decommissioning provision @ 10% recognised
in the books)
Plant Dr. 2.0
To Provision for decommissioning 2.0
(Being increase in decommissioning provision recognised
[13,00,000 – (10,00,000 +1,00,000)] at the end of the year)

Question 25 (RTP Nov 2018 & RTP Nov 2024)

On 1st October, 20X1, XY Ltd. completed the construction of a power generating facility. The total
construction cost was ₹ 2 crore. The facility was capable of being used from 1st October, 20X1 but
XY Ltd. did not bring the facility into use until 1st January, 20X2. The estimated useful life of the
facility at 1st October, 20X1 was 40 years.
Under legal regulations in the jurisdiction in which XY Ltd. operates, there are no requirements to
restore the land on which power generating facilities stand to its original state at the end of the
useful life of the facility. However, XY Ltd. has a reputation for conducting its business in an
environmentally friendly way and has previously chosen to restore similar land even in the
absence of such legal requirements. The directors of XY Ltd. estimated that the cost of restoring
the land in 40 years’ time (based on prices prevailing at that time) would be ₹ 1 crore. A relevant
annual discount rate to use in any discounting calculations is 5%. When the annual discount rate
is 5%, the present value of ₹ 1 receivable in 40 years’ time is approximately 0.142.
Explain and show how the above event would be reported in the financial statements of XY Ltd.
for the year ended 31st March, 20X1. Ignore comments on potential future reclassification issues.

Solution
The facility is depreciated from the date it is ready for use, rather than when it actually starts
being used. In this case, then, the facility is depreciated from 1st October, 20X1.
Although XY Ltd. has no legal obligation to restore the piece of land, it does have a constructive
obligation, based on its past practice and policies.
The amount of the obligation will be 14,20,000 being the present value of the anticipated future
restoration expenditure (1,00,00,000 x 0.142).
This will be recognised as a provision under non-current liabilities in the balance sheet of XY Ltd.
at 31st March, 20X2.

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As time passes the discounted amount unwinds. The unwinding of the discount for the year ended
31st March, 20X2 will be ₹ 35,500 (14,20,000 x 5% x 6/12).
The unwinding of the discount will be shown as a finance cost in the statement of profit and loss
and the closing provision will be ₹ 14,55,500 (14,20,000 + 35,500)
The initial amount of the provision is included in the carrying amount of the non-current asset,
which becomes 2,14,20,000 (2,00,00,000 + 14,20,000).
The depreciation charge in profit or loss for the year ended 31st March, 20X2 is ₹ 2,67,750
(2,14,20,000 x 1/40 x 6/12).
The closing balance included in non-current assets will be 2,11,52,250 (2,14,20,000 – 2,67,750).

ADDITIONAL QUESTIONS

Question 26 (PYQ Nov 2018 (8 Marks))

On 1st April, 2017 Good Time Limited purchased some land for ₹ 1.5 crore (including legal cost of
₹ 10 lakhs) for the purpose of constructing a new factory. Construction work commenced on 1st
May, 2017. Good Time Limited incurred the following costs in relation to its construction.
₹
Preparation and levelling of the land 4,40,000
Purchase of materials for the construction 92,00,000
Employment costs of the construction workers (per month) 1,45,000
Overhead costs incurred directly on the construction of the factory (per month) 1,25,000
Ongoing overhead costs allocated to the construction project (using the 75,000
company's normal overhead allocation model) per month
Costs of relocating employees to work at new factory 3,25,000
Costs of the opening ceremony on 1st January, 2018 2,50,000
Income received during the temporary use of the factory premises as a store 60,000
during the construction period.
The construction of the factory was completed on 31st December, 2017 and production began on
1st February, 2018. The overall useful life of the factory building was estimated at 40 years from
the date of completion. However, it is estimated that the roof will need to be replaced 20 years
after the date of completion and that the cost of replacing the roof at current prices would be 25%
of the total cost of the building.
At the end of the 40 years period, Good Time Limited has a legally enforceable obligation to
demolish the factory and restore the site to its original condition. The company estimates that the
cost of demolition in 40 year's time (based on price prevailing at that time) will be ₹ 3 crore. The
annual risk adjusted discount rate which is appropriate to this project is 8%. The present value of
₹ 1 payable in 40 years time at an annual discount rate of 8% is 0.046.
The construction of the factory was partly financed. by a loan of ₹ 1.4 crore taken out on 1st April,
2017. The loan was at an annual rate of interest of 9%. During the period 1st April, 2017 to 30th
September, 2017 (when the loan proceeds had been fully utilized to finance the construction),
Good Time Limited received investment income of ₹ 1,25,000 on the temporary investment of the
proceeds
You are required to compute the cost of the factory and the carrying amount of the factory in the
Balance Sheet of Good Time Limited as at 31st March, 2018.

Solution
Computation of the cost of the factory
₹
Purchase of land 1,50,00,000
Preparation and levelling 4,40,000
Materials 92,00,000

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CA NITIN GOEL IND AS 16

Employment costs of construction workers (1,45,000 x 8 months) 11,60,000

Direct overhead costs (1,25,000 x 8 months) 10,00,000
Allocated overhead costs Nil
Income from use of a factory as a store Nil
Relocation costs Nil
Cost of the opening ceremony Nil
Finance costs 9,45,000
Investment income on temporary investment of the loan proceeds (1,25,000)
Demolition cost recognised as a provision (3,00,00,000 x 0.046) 13,80,000
Total 2,90,00,000

Computation of carrying amount of the factory as at 31st March, 2018

Land (Non- Factory
depreciable (Depreciable
asset) asset)
Cost of the asset (Total cost 2,90,00,000) 1,50,00,000 1,40,00,000
Less: Depreciation
On Land Nil
On Factory
Depreciation on roof component (1,40,00,000 ×
25% × 1/20 x 3/12) 43,750
Depreciation on remaining factory (1,40,00,000 ×
75% × 1/40 × 3/12) 65,625 (1,09,375)
Carrying amount of depreciable asset ie factory 1,50,00,000 1,38,90,625
Total cost 2,88,90,625
Note:
1. Interest cost has been capitalised based on nine month period. This is because, purchase
of land would trigger off capitalisation.
2. All of the net finance cost of ₹ 8,20,000 (₹ 9,45,000 - ₹ 1,25,000) has been allocated to the
depreciable asset i.e Factory. Alternatively, it can be allocated proportionately between
land and factory.

Question 27 (PYQ Nov 2019 (8 Marks) & (RTP Nov 2018) (Similar)
M Ltd. is setting up a new factory outside the Delhi city limits. In order to facilitate the construction
of the factory and its operations, M Ltd. is required to incur expenditure on the construction/
development of electric-substation. Though M Ltd. incurs (or contributes to) the expenditure on
the construction/development, it will not have ownership rights on these items and they are also
available for use to other entities and public at large. Whether M Ltd. can capitalise expenditure
incurred on these items as property, plant and equipment (PPE)? If yes, then how should these
items be depreciated and presented in the financial statements of M Ltd. as per Ind AS?

Solution
As per Ind AS 16, the cost of an item of property, plant and equipment shall be recognised as an
asset if, and only if:
a) it is probable that future economic benefits associated with the item will flow to the entity; and
b) the cost of the item can be measured reliably.
Further, Ind AS 16 does not prescribe the unit of measure for recognition, i.e., what constitutes an
item of property, plant and equipment. Thus, judgement is required in applying the recognition
criteria to an entity’s specific circumstances.
Ind AS 16, further, states that the cost of an item of property, plant and equipment comprise any
costs directly attributable to bringing the asset to the location and condition necessary for it to be
capable of operating in the manner intended by management.
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CA NITIN GOEL IND AS 16

In the given case, electric-substation is required to facilitate the construction of the refinery and
for its operations. Expenditure on these items is required to be incurred in order to get future
economic benefits from the project as a whole which can be considered as the unit of measure
for the purpose of capitalisation of the said expenditure even though the company cannot restrict
the access of others for using the assets individually. It is apparent that the aforesaid expenditure
is directly attributable to bringing the asset to the location and condition necessary for it to be
capable of operating in the manner intended by management.
In view of this, even though M Ltd. may not be able to recognise expenditure incurred on electric-
substation as an individual item of property, plant and equipment in many cases (where it cannot
restrict others from using the asset), expenditure incurred may be capitalised as a part of overall
cost of the project.
From this, it can be concluded that, in the extant case the expenditure incurred on electric-
substation should be considered as the cost of constructing the factory and accordingly,
expenditure incurred on electric-substation should be allocated and capitalised as part of the
items of property, plant and equipment of the factory.
Depreciation
As per Ind AS 16, each part of an item of property, plant and equipment with a cost that is
significant in relation to the total cost of the item shall be depreciated separately.
Further, Ind AS 16 provides that, if these assets have a useful life which is different from the useful
life of the item of property, plant and equipment to which they relate, it should be depreciated
separately. However, if these assets have a useful life and the depreciation method that are the
same as the useful life and the depreciation method of the item of property, plant and equipment
to which they relate, these assets may be grouped in determining the depreciation charge.
Nevertheless, if it has been included in the cost of property, plant and equipment as a directly
attributable cost, it will be depreciated over the useful lives of the said property, plant and
equipment.
The useful lives of electric-substation should not exceed that of the asset to which it relates.
Presentation
Electric-substation should be presented within the class of asset to which they relate i.e. factory.
(In RTP Nov 2018 it was railway siding, road and bridge instead of electric substation)

Question 28 (PYQ May 2023 (8 Marks))

On 1st May, 2022, Sanskar Limited purchased ₹ 42,00,000 worth of land for construction of a new
warehouse for stocking new products.
The land purchased had an old temporary structure which was to be demolished for the purpose
of construction of warehouse. The salvaged material from the demolition was to be sold as scrap.
The company started the construction work of the warehouse on 1st June, 2022. Following costs
were incurred by the company with regard to purchase of land and construction of warehouse:
Particulars Amount (₹)
Legal fees for purchase contract of land and recording ownership 1,50,000
Architect and consultant's fee 2,70,000
Cost of demolishing existing structure on the purchased land 1,35,000
Site preparation charges for the warehouse 1,00,000
Purchase of cement and other materials for the construction (including GST of ₹ 15,00,000
1,00,000 and GST credit is 50% of the payment)
Employment costs of the construction workers 8,00,000
General overhead costs allocated to the construction work 30,000
per month
Overhead costs incurred directly on the construction of warehouse 35,000
per month
Income received from land used as temporary parking during construction phase 80,000

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CA NITIN GOEL IND AS 16

Additional Information:
• Receipt of ₹ 35,000 being proceeds from sale of salvaged and scrapped materials from
demolition of existing structure.
• Materials costing ₹ 40,000 was wasted and further ₹ 1,20,000 was spent to rectify the wrong
design work.
• The employment costs are for 10 months i.e. from 1st June 2022 till 31st March, 2023.
• The construction of factory was completed on 28th February, 2023 (which is considered as
substantial period of time as per Ind AS 23)
• The use of warehouse commenced on 1st March, 2023.
• The overall useful life of factory building was estimated at 25 years from the date of
completion; however, it is estimated that the roof of the warehouse will need to be replaced
15 years after the date of completion and that the cost of replacing the roof at current prices
would be 25% of the total cost of the building.
• At the end of the 25-year period, Sanskar Limited is legally bound to demolish the factory and
restore the site to its original condition. The directors of the company estimate that the cost
of demolition in 25 years' time (based on prices prevailing at that time) will be ₹ 80,00,000. An
annual risk adjusted discount rate which is appropriate to this project is 10% p.a. The present
value of ₹ 1 payable in 25 years' time at an annual discount rate of 10% p.a. is ₹ 0.092.
• Sanskar Limited raised a loan of ₹ 60 lakhs @ 10% per annum rate of interest on 1st June,
2022. The building of warehouse meets the definition of a qualifying asset in accordance with
Ind AS 23 Borrowing Costs. Sanskar Limited received an investment income of ₹ 25,000 on
the temporary investment of the proceeds.
• Assume that cost of demolition of old structure is directly attributable to the cost of land.
• The company follows straight line method of depreciation.
You are required to compute:
a. Cost of construction of the warehouse
b. Depreciation charge for the year ended 31st March, 2023
c. Carrying value of warehouse to be taken to Balance Sheet of Company on 31st March, 2023.
Explain your treatment of all the amounts referred to in this question as part of your answer.

Solution
Computation of the cost of construction of the warehouse
Description Included in Explanation
P.P.E. ₹
Purchase of land 42,00,000 Separately capitalised as cost of land and do not
form part of cost of construction of warehouse
Legal fee for purchase of 1,50,000 Associated legal costs are direct costs for
contract of land purchasing the land. Hence, separately capitalised as
cost of land and do not form part of cost of
construction of warehouse
Net cost of demolishing the 1,00,000 Given in the question to assume it as directly
existing structure attributable to the cost of land. However, it will be
adjusted with the proceeds from sale of salvaged
material from demolition (1,35,000 – 35,000). Further,
it will be separately capitalised as cost of land and
do not form part of cost of construction of
warehouse.
Total cost of land 44,50,000
Architect and consultant’s 2,70,000 A direct cost of constructing the warehouse
fee
Site preparation charges 1,00,000 A direct cost of constructing the warehouse
Cement and other 14,10,000* A direct cost of constructing the warehouse net GST
materials credit and wastage (15,00,000 – 50,000 – 40,000)
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CA NITIN GOEL IND AS 16

Expense to rectify the Nil Assumed to be abnormal cost

wrong design work
Employment costs of the 7,20,000 A direct cost of constructing the warehouse for 9
construction workers month period till 28th Feb., 2023 [(8,00,000/10) x 9]
Direct overhead costs 3,15,000 A direct cost of constructing the warehouse for a
nine-month period (35,000 x 9)
Allocated overhead costs Nil Not a direct cost of construction
Income from temporary use Nil Not essential to the construction so recognised
of land as car parking area directly in profit or loss
Finance costs 4,50,000 Capitalise the interest cost incurred in a nine-month
period (from 1st June, 2022 to 28th February, 2023)
Investment income on (25,000) Offset against the interest amount capitalised
temporary investment of
the loan proceeds
Demolition cost Recognised as part of the initial cost at present value
recognised as a provision 7,36,000 (i.e 80,00,000 x 0.092)
Total cost of construction of 39,76,000
a warehouse
a. Computation of depreciation charges for the year ended 31st March, 2023
Land is not depreciated as per Ind AS 16. Hence, only cost of warehouse is subject to depreciation.
Total depreciable amount as on 1st Mar, 2023 39,76,000
Depreciation for 1 month must be in two parts:
(a) Depreciation on roof component 5,522 39,76,000 x 25% x 1/15 x 1/12
(b) Depreciation of remaining item 9,940 39,76,000 x 75% x 1/25 x 1/12
Total depreciation for the year 2022-2023 15,462
b. Computation of carrying value of the warehouse on 31 st March, 2023
Cost of the warehouse as on 1st March, 2023 [computed in (i) above] 39,76,000
Less: Depreciation for 1 month as computed in (ii) above (15,462)
Carrying value of the warehouse as on 31st March, 2023 39,60,538
*Note: In the above solution, it has been assumed that amount spent for rectifying the faulty design
is not included in the cement and other material cost. However, alternatively, it may be considered
as part of gross cement and material cost and in such a case, the cost of material will further be
reduced with the amount of rectifying the faulty design as follows:
Computation of the cost of construction of the warehouse
Description Included in Explanation
P.P.E. ₹
Purchase of land 42,00,000 Separately capitalised as cost of land and do not
form part of cost of construction of warehouse
Legal fee for purchase of 1,50,000 Associated legal costs are direct costs for
contract of land purchasing the land. Hence, separately capitalised
as cost of land and do not form part of cost of
construction of warehouse
Net cost of demolishing the 1,00,000 Given in the question to assume it as directly
existing structure attributable to the cost of land. However, it will be
adjusted with the proceeds from sale of salvaged
material from demolition (1,35,000 – 35,000).
Further, it will be separately capitalised as cost of
land and do not form part of cost of construction of
warehouse.
Total cost of land 44,50,000
Page 9.23
CA NITIN GOEL IND AS 16

Architect and consultant’s 2,70,000 A direct cost of constructing the warehouse

fee
Site preparation charges 1,00,000 A direct cost of constructing the warehouse
Cement and other 12,90,000* A direct cost of constructing the warehouse net GST
materials credit, wastage and rectification cost (15,00,000 –
50,000 – 40,000 – 1,20,000)
Employment costs of the 7,20,000 A direct cost of constructing the warehouse for 9
construction workers month period till 28th Feb., 2023 [(8,00,000/10) x 9]
Direct overhead costs 3,15,000 A direct cost of constructing the warehouse for a
nine-month period (35,000 x 9)
Allocated overhead costs Nil Not a direct cost of construction
Income from temporaryuse Nil Not essential to the construction so recognised
of land as car parking area directly in profit or loss
Finance costs 4,50,000 Capitalise the interest cost incurred in 9 month
period (from 1st June, 2022 to 28th February, 2023)
Investment income on Offset against the interest amount capitalised
temporary investment of (25,000)
the loan proceeds
Demolition cost recognised 7,36,000 Recognised as part of the initial cost at present
as a provision value (i.e 80,00,000 x 0.092)
Total cost of construction 38,56,000
of a warehouse
a. Computation of depreciation charges for the year ended 31 st March, 2023
Land is not depreciated as per Ind AS 16. Hence, only cost of warehouse is subject to depreciation.
Total depreciable amount as on 1st March, 2023 38,56,000
Depreciation for 1 month must be in two parts:
(a) Depreciation on roof Component 5,356 38,56,000 x 25% x 1/15 x 1/12
(b) Depreciation of remaining item 9,640 38,56,000 x 75% x 1/25 x 1/12
Total depreciation for the year 2022-2023 14,996
b. Computation of carrying value of the warehouse on 31st March, 2023
Cost of the warehouse as on 1st March, 2023 [computed in (i) above] 38,56,000
Less: Depreciation for 1 month as computed in (ii) above (14,996)
Carrying value of the warehouse as on 31st March, 2023 38,41,004

Question 29 (RTP Nov 2020)

Entity X has a warehouse which is closer to factory of Entity Y and vice versa. The factories are
located in the same vicinity. Entity X and Entity Y agree to exchange their warehouses. The carrying
value of warehouse of Entity X is ₹ 1,00,000 and its fair value is ₹ 1,25,000. It exchanges its
warehouse with that of Entity Y, the fair value of which is ₹ 1,20,000. It also receives cash
amounting to ₹ 5,000. How should Entity X account for the exchange of warehouses?

Solution
Paragraph 24 of Ind AS 16, inter alia, provides that when an item of property, plant and equipment
is acquired in exchange for a non-monetary asset or assets, or a combination of monetary and
non-monetary assets, the cost of such an item of property, plant and equipment is measured at
fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value
of neither the asset received nor the asset given up is reliably measurable. If the acquired item is
not measured at fair value, its cost is measured at the carrying amount of the asset given up.
Further as per paragraph 25 of Ind AS 16, an entity determines whether an exchange transaction
has commercial substance by considering the extent to which its future cash flows are expected
to change as a result of the transaction. An exchange transaction has commercial substance if:

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CA NITIN GOEL IND AS 16

a. the configuration (risk, timing and amount) of the cash flows of the asset received differs
from the configuration of the cash flows of the asset transferred; or
b. the entity-specific value of the portion of the entity’s operations affected by the transaction
changes as a result of the exchange; and
c. the difference in (a) or (b) is significant relative to the fair value of the assets exchanged.
In the given case, the transaction lacks commercial substance as the company’s cash flows are
not expected to significantly change as a result of the exchange because the factories are located
in the same vicinity i.e. it is in the same position as it was before the transaction
Hence, Entity X will have to recognise the assets received at the carrying amount of asset given
up, i.e., ₹ 1,00,000 being carrying amount of existing warehouse of Entity X and ₹ 5,000 received
will be deducted from the cost of property, plant and equipment.
Therefore, the warehouse of Entity Y is recognised as property, plant and equipment with a
carrying value of ₹ 95,000 in the books of Entity X.

Question 30 (MTP May 2020)

Flywing Airways Ltd is a company which manufactures aircraft parts and engines and sells them
to large multinational companies like Boeing and Airbus Industries.
On 1 April 20X1, the company began the construction of a new production line in its aircraft parts
manufacturing shed.
Costs relating to the production line are as follows:
Details Amount
Rs.’000
Costs of the basic materials (list price ₹12.5 million less a 20% trade discount) 10,000
Recoverable goods and services taxes incurred not included in purchase cost 1,000
Employment costs of the construction staff for the three months to 30 June 20X1 1,200
Other overheads directly related to the construction 900
Payments to external advisors relating to the construction 500
Expected dismantling and restoration costs 2,000
Additional Information
The construction staff was engaged in the production line, which took two months to make ready
for use and was brought into use on 31 May 20X1.
The other overheads were incurred in the two months period ended on 31 May 20X1. They included
an abnormal cost of ₹3,00,000 caused by a major electrical fault.
The production line is expected to have a useful economic life of eight years. At the end of that
time Flywing Airways Ltd is legally required to dismantle the plant in a specified manner and
restore its location to an acceptable standard. The amount of ₹2 million mentioned above is the
amount that is expected to be incurred at the end of the useful life of the production line. The
appropriate rate to use in any discounting calculations is 5%. The present value of Re.1 payable in
eight years at a discount rate of 5% is approximately Re.0·68.
Four years after being brought into use, the production line will require a major overhaul to
ensure that it generates economic benefits for the second half of its useful life. The estimated
cost of the overhaul, at current prices, is ₹3 million.
The Company computes its depreciation charge on a monthly basis. No impairment of the plant
had occurred by 31 March 20X2.
Analyze the accounting implications of costs related to production line to be recognized in the
balance sheet and profit and loss for the year ended 31 March, 20X2.

Page 9.25
CA NITIN GOEL IND AS 16

Solution
Statement showing Cost of production line:
Particulars Amount ₹’000
Purchase cost 10,000
Goods and services tax – recoverable goods and services tax not included -
Employment costs during the period of getting the production line ready for 800
use (1,200 x 2 months / 3 months)
Other overheads – abnormal costs 600
Payment to external advisors – directly attributable cost 500
Dismantling costs – recognized at present value where an obligation exists 1,360
(2,000 x 0.68)
Total 13,260

Carrying value of production line as on 31st March, 20X2:

Particulars Amount ₹ ’000
Cost of Production line 13,260
Less: Depreciation (W.N.1) (1,694)
Net carrying value carried to Balance Sheet 11,566

Provision for dismantling cost:

Particulars Amount ₹ ’000
Non-current liabilities 1,360
Add: Finance cost (WN3) 57
Net book value carried to Balance Sheet 1,417

Extract of Statement of Profit & Loss

Particulars Amount ₹ ’000
Depreciation (W.N.1) 1,694
Finance cost (W.N.2) 57
Amounts carried to Statement of Profit & Loss 1,751

Extract of Balance Sheet

Particulars Amount ₹ ’000
Assets
Non-current assets
Property, plant and equipment 11,566
Equity and liabilities
Non-current liabilities
Other liabilities
Provision for dismantling cost 1417

Working Notes:
Calculation of depreciation charge
Particulars Amount ₹ ’000
In accordance with Ind AS 16 the asset is split into two depreciable
components: Out of the total capitalization amount of 13,260, Depreciation for
3,000 with a useful economic life (UEL) of four years (3,000x ¼ x10/12).
This is related to a major overhaul to ensure that it generates economic 625
benefits for the second half of its useful life
For balance amount, depreciation for 10,260 with an useful economic life 1,069
(UEL) of eight years will be : 10,260 x 1/8 x 10/12
Total (To Statement of Profit & Loss for the year ended 31st March 20X2) 1,694
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CA NITIN GOEL IND AS 16

Finance costs
Particulars Amount ₹ ’000
Unwinding of discount (Statement of Profit and Loss – finance cost) 57
1,360 x 5% x 10/12
To Statement of Profit & Loss for the year ended 31st March 20X2 57

Question 31 (PYQ Nov 2023 (5 Marks))

A shipping company is required by law to bring all its ships into dry dock every 5 years for a major
inspection and overhaul. Overhaul expenditure might at first sight seem to be repair to the ships
but is actually a cost incurred in getting the ship back into a seaworthy condition. As such the
costs must be capitalised.
A ship that cost ₹ 40 Crore with 20-year life must have a major overhaul every 5 years. The
estimated cost of the first overhaul is ₹ 10 Crores.
Calculate:
a) the depreciation charged for first five years;
b) the carrying amount at the end of 5th year.

Solution
a. Computation of depreciation charged for the first 5 years
The depreciation charge for the first five years of the asset’s life will be as follows:
Overhaul component Ship (other than overhaul
(₹ in crores) component) (₹ in crores)
Cost 10 30
Years 5 20
Depreciation per year 2 1.50
Total accumulated depreciation for the first five years will be -
= (₹ 2 crores + ₹ 1.50 crores) x 5 years
= ₹ 17.50 crores

b. Computation of carrying amount of the ship at the end of 5th year

Carrying amount of the ship at the end of 5th year = ₹ 40 crores - ₹ 17.50 crores
= ₹ 22.50 crores

Question 32 (PYQ Nov 2024 (6 Marks))

On 1st April, 2020, Peacock Ltd. started its manufacturing operations by installing a machine in the
rented premises. The estimated life of the machine is 4 years. As per the terms of rental
agreement, Peacock Ltd. has a present obligation to dismantle the machine and restore the
premises into its original shape. The company estimates to incur ₹ 6,00,000 at the end of 4th year
to restore the premises into the original shape. The borrowing rate applicable to the company is
8%. (Note: PV Factor for 4th year discounted @ 8% = 0.735)
You are required to:
(i) Advise the accounting treatment of the above; and
(ii) Pass necessary journal entries across all four years.

Solution
(i) Accounting Treatment
The present value of such decommissioning and site restoration obligation at the end of 4th
year is ₹ 4,41,000 [being 6,00,000 / (1.08)4]. Peacock Ltd. will recognize the present value of
decommissioning liability of ₹ 4,41,000 as an addition to cost of PPE and will also recognize
a corresponding decommissioning liability.
Further, the entity will recognize the unwinding of discount as finance charge every year till
the estimated life of the machine.

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CA NITIN GOEL IND AS 16

(ii) Journal Entries

Date Particular Dr. (₹) Cr. (₹)
1 April,
st
Machine A/c (PPE) Dr. 4,41,000
2020 To Provision for decommissioning liability 4,41,000
(Being the present value of decommissioning liability
of ₹ 4,41,000 recognized as an addition to cost of PPE
with corresponding recognition to decommissioning
liability)
31st March, Finance charge Dr. 35,280
2021 To Provision for decommissioning liability 35,280
(Being the unwinding of discount as finance charge
recognized at the end of Year 1)
Profit and Loss A/c Dr. 35,280
To Finance charge 35,280
(Being Finance charge transferred to Profit & Loss A/c)
31st March, Finance charge Dr. 38,102
2022 To Provision for decommissioning liability 38,102
(Being the unwinding of discount as finance charge
recognized at the end of Year 2)
Profit and Loss A/c Dr. 38,102
To Finance charge 38,102
(Being Finance charge transferred to Profit & Loss A/c)
31st March, Finance charge Dr. 41,151
2023 To Provision for decommissioning liability 41,151
(Being the unwinding of discount as finance charge
recognized at the end of Year 3)
Profit and Loss A/c Dr. 41,151
To Finance charge 41,151
(Being Finance charge transferred to Profit & Loss A/c)
31st March, Finance charge Dr. 44,467
2024 To Provision for decommissioning liability 44,467
(Being the unwinding of discount as finance charge
recognized at the end of Year 4)
Profit and Loss A/c Dr. 44,467
To Finance charge 44,467
(Being Finance charge transferred to Profit & Loss A/c)
Provision for decommissioning liability Dr. 6,00,000
To Bank A/c 6,00,000
(Being decommissioning liability incurred at the end of
the life of the machine i.e. 4th year)

Working Note:
The following table shows the unwinding of discount (₹)
Year Opening Decommissioning Unwinding of Closing Decommissioning
Liability Interest @ 8% Liability
1 4,41,000 35,280 4,76,280
2 4,76,280 38,102 5,14,382
3 5,14,382 41,151 5,55,533
4 5,55,533 44,467* 6,00,000
*Difference of ₹ 24 (44,467- 44,443) is due to rounding off.

Page 9.28