Ind AS 16 & IAS 16 – PPE : Summary of provisions on the initial cost to be recognized

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Initially, all the PPE should be measured at the cost.

Elements of cost:

1. The purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.

2. Any costs are 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.

3. The initial estimate of the cost of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.

Analysis of the initial measurement provision:

• “Non-refundable purchase taxes”:

They refer to the purchase taxes like VAT, Sales tax, Excise duty etc. These purchase taxes will be added to the cost of the asset if either they will not be refunded by the government or the entity will not be able to use the taxes paid as “input”.

• There are two types of discounts – Trade discounts and Cash discounts.

Trade discounts – Discounts given at the time of purchase by the supplier on the “List Price” of the product. This discount received should be reduced from the cost of the asset.

Cash Discount – Discount given by the supplier when the buyer pays the amount before the credit period expires. This discount received will not be reduced from the cost of the asset.

• Example for “Initial estimate of the costs of dismantling and removing”:

There is a condition in the lease agreement for a building that the Lessee (tenant) will have to remove the lift installed by them after the lease period is over.

Facts of the case:

The cost of the lift = INR 9,000,000

Date of purchase of lift = 1 April 2015

The estimated cost of uninstalling the lift from the building is INR 2,000,000

The lease period ends in 10 years, thus this expense of uninstalling will be incurred only at the end of 10 years.

As per the concept of discounting (this concept states that the value of money now will be different from the value of money in the future. Generally the value of money decreases in future due to inflation) the value of money INR 2,000,000 to be spent after 10 years will be INR 1,000,000 (assumed to be) as per value of money as on 1 April 2015.

There will be a rewinding of interest entries passed every year. As a result of interest unwinding, by the end of the tenth year the “provision for uninstallation” will be INR 2,000,000 and there will be interest cost every year.

Examples of cost directly attributable:

1. Cost of employee benefits.

2. Cost of site preparation.

3. Initial delivery and handling cost.

4. Cost of testing, after deducting the net proceeds from selling the items produced while testing.

5. Professional fees – Architects, engineers etc.

Examples of the cost that is not included in PPE:

1. Costs of opening a new facility;

2. Costs of introducing a new product or service

3. Costs of conducting business in a new location or with a new class of customers.

4. Promotional or advertising cost.

5. Administration and other general overhead costs.

Initial recognition of the cost of PPE ceases when the item is in the location and condition necessary for it to be capable of operating in the manner intended by management. Thus the recognition of cost stops when the asset is “Ready to use” and not when “Put to use”

Incidental operations are not necessary to bring an item to the location and condition necessary for it to be capable of operating in the manner intended by management, the income and related expenses of incidental operations are recognized in profit or loss.

One of the important implications of adopting Ind AS (convergence to IFRS) in accounting for PPE - If payment is deferred beyond normal credit terms offered by the supplier to all its customers, then the difference between the cash price equivalent and the total payment (the “total payment” to be made to the supplier by the buyer, will in most cases, be higher than the cash price as there is additional credit period is offered) is recognised as interest over the period of credit (as indirectly t becomes a financing arrangement).

This article has been published in the Chartered Accountant Study Circle ("CASC") Bulletin.